The Intersection of the FCPA, TI-CPI and Tax Appeals in Brazil

The Transparency International-Corruptions Perceptions Index (TI-CPI) is released each year in November. The TI-CPI rates Brazil as 69^th out of 175 countries on its index, coming in with a score of 43 out of 100. I wonder if TI might consider an interim report this year on Brazil? As things keep going, more and more corruption is alleged to be a part of the everyday fabric of the country. While the Petrobras and related scandals have been well chronicled, the overall stench of corruption just keeps spreading and spreading.

Recently it was announced yet another set of investigations around corruption has begun. This time it involves the Brazilian Finance Ministry’s Administrative Council for Tax Appeal. In an article in the Wall Street Journal (WSJ), entitled “Brazil Probes New Bribery Allegations”, Paulo Trevisani reported that this is an “arbitration board that hears appeals from taxpayers who dispute how much they owe the [Brazilian] government.” The investigation would appear to be widespread as “Prosecutors said 74 companies and 24 individuals are under investigation.”

Interestingly not only is the Finance Ministry investigating the allegations but also the Brazilian internal revenue service, the Brazilian federal police and the Brazilian federal prosecutors office. In what would seem to indicate the inherent conflict of interest in the Finance Ministry investigating itself, Trevisani reported the “Finance Ministry said the alleged scheme wasn’t systematic but rather, involved “isolated acts” carried out by a small group of government tax officials. When prosecutors announced the investigation on March 26 they said that losses to the nation’s treasury totaled $6.1 billion over 15 years.” Oops.

While the entities and individuals under investigation have not been named, “a leading investigator on the case said companies under investigation include Ford Motor Brazil, a unit of Ford Motor Co.; JBS, the world’s largest meatpacker, the Brazilian unit of the Spanish bank Banco Santander SA; and Brazil’s second largest private-sector bank, Bradesco SA.” You may recall from an earlier blog post I noted that Brazil’s third largest state-owned bank Caixa Econômica Federal (Caixa) is also under investigation for corruption.

However, this new corruption scandal is the first time that non-Brazilian companies have come under investigation outside of the Petrobras scandal. The WSJ article noted, “Brazil’s tax system is among the most onerous and complex in the world. Penalties can be steep. That has fostered an environment where corruption can flourish, [un-named] experts say. “Taxes in Brazil are so high and complicated that it is easy for companies to get in trouble with the taxman,” the leading investigator told The Wall Street Journal. The investigator said frequent tax disputes created opportunities for ill-intentioned public servants to profit by helping firms circumvent red tape. Prosecutors say the probe began in 2013 after they received an anonymous letter describing details of the alleged scheme.”

An article in forbes.com, entitled “Ford On List Of Companies Suspected Of Brazilian Tax Fraud” by Kenneth Rapoza, went further than the WSJ article when it laid out the list of “companies are under investigation for taking part in various tax bribery schemes” and then listed the amounts they allegedly avoided paying. The Top Ten list is:

• Santander: R$3.3 billion
• Bradesco: R$2.7 billion
• Ford: R$1.7 billion
• Gerdau: R$1.2 billion
• Light: R$929 million
• Banco Safra: R$767 million
• RBS: R$672 million
• Camargo Correa: R$668 million
• Mitsubishi: R$505 million
• Banco Industrial: R$436 million

An article in businessinsider.com, entitled “Brazil uncovers multibillion-dollar tax fraud”, reported that this investigation, dubbed Operation Zeal, had uncovered that “the [tax] body managed to obtain tax appeals board rulings in the companies’ favor by either cutting penalties or waiving them altogether. In return, officials allegedly received bribes from some 70 companies believed to have benefited from the scheme. A written statement issued by Brazilian federal police stated “The investigations, begun in 2013, showed the organization acted within the body sponsoring private interests, seeking to influence and corrupt advisors with a view either to securing the cancellation or reduction of penalties from tax authorities”. Moreover, “Police said the scam could have netted the companies as much as 19 billion reais ($5.9 billion) but evidence uncovered so far amounts to around a third of that amount.” Finally, and perhaps most ominously, the article said, “Federal police organized crime chief Oslain Campos Santan said the total sums could end up being “as much” as that involved in the Petrobras scam”.

This new Brazilian corruption scandal recalls the Foreign Corrupt Practices Act (FCPA) enforcement action against the Houston-based Parker Drilling Company. According to the Department of Justice (DOJ) Press Release issued at the time of the announcement of the conclusion of the matter, the company was issued a tax assessment on its drilling rigs. The Press Release went on to state, “According to court documents, rather than pay the assessed fine, Parker Drilling contracted indirectly with an intermediary agent to resolve its customs issues. From January to May 2004, Parker Drilling transferred $1.25 million to the agent, who reported spending a portion of the money on various things including entertaining government officials. Emails in which the agent requested additional money from Parker Drilling referenced the agent’s interactions with Nigeria’s Ministry of Finance, State Security Service, and a delegation from the president’s office. Two senior executives within Parker Drilling at the time reviewed and approved the agent’s invoices, knowing that the invoices arbitrarily attributed portions of the money that Parker Drilling transferred to the agent to various fees and expenses. The agent succeeded in reducing Parker Drilling’s TI Panel fines from $3.8 million to just $750,000.”

So with all of the above that has been written about in the past few weeks, where do you think Brazil should be on the TI-CPI? While its rating of 43 out of 100 may not seem too low or perhaps more accurately too much perceived corruption, it may be time for a mid-year reassessment. Certainly if you are a Chief Compliance Officer (CCO) or compliance practitioner you may wish to perform your own reassessment. If you have any dealings with the Brazilian Finance Ministry’s Administrative Council for Tax Appeal, you need to perform an internal investigation starting today on all information you can find about the process and results. For if the results were extremely favorable the reason for the achievement may have violated both Brazilian law and the FCPA.

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, 2015

The Engineer’s Thumb and How to Bribe

We conclude our week of Sherlock Holmes inspired themes with one of the few cases in which Holmes fails to bring the criminals to justice, The Adventure of the Engineer’s Thumb. In this adventure a young engineer, Victor Hatherley, arrives at Dr. Watson’s surgery with a gruesome injury, a severed thumb. He relates his tale to Watson, who then takes him to see Holmes. Hatherley was hired to inspect a hydraulic press by one Lysander Stark, who claims that it is used to compress fuller’s earth into bricks. However when Hatherley goes to Stark’s country residence to inspect the machine he discovers that it is actually a printing press used to create counterfeit money. He tries to flee and in the process, Hatherley is forced to jump from a second story window, in the process getting his thumb severed by Stark’s cleaver. Hatherley, Watson and Holmes arrive at the Stark residence as the house is on fire, and the perpetrators have fled.

Once again using the Holmes tale as a contrast I refer to the recently released white paper, published by Transparency International UK (TI-UK), entitled “How to Bribe: A typology of Bribe-Paying and How to Stop It”. It was created by TI-UK, lawyers from the London firm of Pinsent Masons and thebriberyact.com, with principal author Julia Muravska and editors Robert Barrington and Barry Vitou. Just as Stark hid the true purpose of his hydraulic press, the title of this work does not convey its true use in how to stop bribes and bribery schemes by identifying them.

 Barry Vitou, partner in Pinsent Masons and co-founder of thebriberyact.com, states in the forward that “This handbook is perfect for General Counsel, Chief Compliance Officers and anyone in any company responsible for anti-bribery compliance from the Board of Directors, down. The purpose is to show how people pay bribes in practice. The examples are based on realistic experiences or real cases. Many bribery cases receive little attention. Often the focus is on the international examples in far away places where, it is sometimes said, you have to ‘pay the man’ to get business done. The impression given is that it would never happen at home. Yet it does. While the first two sections focus on the how, why and when bribes are sometimes paid in a short final section the handbook covers some examples of more prosaic bribery, at home. Who said it could never happen here? Transparency International deserve credit, once again, for putting together a document designed to be practical and helpful for those keen to avoid falling into the trap of bribery.” The white paper has three main sections.

Section I: What is a Bribe?

In this section, the authors review what constitutes a bribe. Recognizing that cash will always be king, they also take a look at excessive gifts, entertainment and travel, charitable donations and political contributions, favors to family members or friends and even the Foreign Corrupt Practices Act (FCPA) exempted facilitation payments. I particularly found the discussion of facilitation payments interesting in light of the recent claims that Archer Daniels Midland Company (ADM) in the Ukraine and Wal-Mart in Mexico were essentially making facilitation payments.

The authors end this section with the following guidance about the specific types of bribe and how to spot them.

Section 2: How Bribes are Paid?

In this section, the white paper lays out a variety of different bribery schemes. Of course they include agents, distributors, intermediaries, introducers, sub-contractors, representatives and the like. But they also detail schemes that the compliance practitioner should acquaint his or herself on. These bribery schemes include false or inflated invoicing or products, offshore payment arrangements and off-balance sheet payments, joint ventures, training, per diems and expense reimbursement arrangements, rebates and discounts and employment agreements. Once again, the authors end this section with the guidance on how to spot and stop each of the bribery schemes they detail.

Section 3: Bribery On Your Doorstep

In this section, the authors cite to cases and examples that were derived from real cases and illustrate how bribes can be paid within the UK. They note that even though “bribery is illegal across the board in the UK, experience shows that bribery also happens in the UK” and cite several reports. The first was by TI-UK and it showed that 5% of citizens polled in the UK said they had paid a bribe at least once in the past twelve months. Further, a recent survey of the construction sector found that more than a third of the industry professionals polled stated that they had been offered a bribe or incentive on at least one occasion. Lastly, the white paper notes that the first three prosecutions under the UK Bribery Act were for bribes paid in the UK. So the authors conclude “It is fair to say that in common with many other countries, UK public officials are susceptible to bribery. Public officials are almost all, universally, paid less than their peers may be paid in the private sector but in many cases in their hands rests the power to make decisions which have huge financial consequences for others. All the ingredients for paying a bribe exist. Likewise, bribes may be paid in the private sector, and there is increasingly a grey area between public and private sector as government services are contracted out.” In this section, some of the examples are inflated invoices, bribes to local planning departments, excessive expenses for training, and even an example of bribes paid to police.

Suggested Reading

Although neither this blog nor the books I have published on anti-corruption compliance made their list, there is an excellent resource list at the end of the white paper for additional reading and research on the subject. It ranges from government guidance’s to David Lawler’s excellent text “Frequently Asked Questions in Anti-Bribery and Corruption”.  Their list is an excellent resource in and of itself.

So we finish our Sherlock Holmes themed blogs. I hope that you have enjoyed the stories and tie-ins as much as I have enjoyed revisiting them this past week.

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

What’s Going On? Some Questions Regarding UK Regarding Anti-Bribery Enforcement

For my money, the greatest R&B single ever was Marvin Gaye’s 1971 smash hit “What’s Going On?” While I knew that Gaye, who died in 1984, had been posthumously inducted to the Rock and Roll Hall of Fame in 1987; I did not know that he had a a three-octave vocal range or that he  was ranked at number 6 on Rolling Stone’s list of the Greatest Singers of All Time. Gaye also ranked high on music magazines’ lists, ranking at number 18 on the 100 Greatest Artists of All Time on the  music magazine, Rolling Stone and he ranked number 20 on VH-1’s list of 100 Greatest Artists of All Time. See if you want to hear some of the most beautiful and heartfelt singing, head over to YouTube for a clip of Gaye belting out the classic.

I thought about the song’s title recently as over the past couple of weeks there have been some interesting articles appearing in interviews, reports and a London court ruling which raise some difficult questions as to just what may be going on at the UK Serious Fraud Office (SFO) regarding its enforcement of the UK Bribery Act and the ongoing ability of the SFO to bring enforcement actions for those companies which engage in bribery or otherwise violate the Bribery Act.

The Interview and Questions on Enforcement of Corporate Hospitality Requirements

It all began with an interview, given by David Green, Director of the SFO, to the Daily Mail on September 2. As reported in thebriberyact.com, Director Green said the following:

‘We are not interested in that sort of case. We are interested in hearing that a large company has mysteriously come second in bidding for a big contract. The sort of bribery we would be investigating would not be tickets to Wimbledon or bottles of champagne. We are not the “serious champagne office”.’

The briberyact.com guys, Barry Vitou and Richard Kovalevsky Q.C., made clear their feelings on this statement by Director Green when they said “Hopefully the latest comments from the new SFO Director will kill off some of the scaremongering that has gone before among the media and some legal advisers.” The Bribery Act and its corporate hospitality requirements are “not rocket science.” They believe that   “Companies should put in place proper procedures to deal with corporate hospitality in line with SFO guidance. Broadly speaking, “this means companies should think about their corporate hospitality process, and pick a number above which approval is required. If you want you can pick some more numbers above which a higher level of approval is required.”

The Briberyact.com guys do not believe that the “SFO is unlikely to be bringing a stand alone Bribery Act prosecution over corporate hospitality.” They also believe that the key in justifying your actions with gifts and entertainment “is to be able to justify why you picked approval thresholds and that the policy is actually followed. Both should be well documented.” In other words, you should have a policy, follow that policy and then document whatever decisions that you make under your policy.

However, a contrary position was taken by Alexandra Wrage, President of Trace International, who wrote in a blog post in CorporateCounsel.com, entitled “When Governments Undermine Antibribery Compliance Efforts”. Wrage asked the following question regarding Director Green’s advice on corporate hospitality, “So where does Green’s advice leave in-house compliance officers?” She went on to state that she believed such advice left compliance practitioners “arguing for frugality in the face of a restrictive law that the SFO has announced it isn’t too bothered about enforcing. There are few U.S. compliance departments that would deem a day at Wimbledon as “reasonable” hospitality. In the U.S., the argument is: this is permitted, as long as we’re reasonable. The argument for companies with operations in the U.K. must be: this is not permitted under the law, but the SFO, at least for now, will not investigate such matters.” She ended her piece with the following, “It is difficult enough to guide a company through the morass of antibribery compliance when the threat of enforcement is real and management is focused not only on the ethics of the situation, but also legal risk. It is indeed more difficult when the enforcement agency itself makes light of the chances of prosecution and trivializes the very decisions with which compliance departments struggle. The UK Bribery Act may offer the clarity compliance officers have long hoped for, but it raises a new question for companies with U.K. operations that may be more challenging than the last: When do boundaries really matter to the SFO and, in turn, to employees?”

The TI Exporting Corruptions Report

On September 6, Transparency International (TI) published its 8th annual progress report on OECD Convention enforcement, entitled “Exporting Corruption”. The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, adopted in 1997, requires each signatory country, of which the United Kingdom is a member, to make foreign bribery a crime. TI believes that such laws are a key instrument for curbing the export of corruption globally because the 39 signatory countries are responsible for two-thirds of world exports and three-quarters of foreign investment. The OECD Working Group on Bribery conducts a follow-up monitoring program which reviews the parties’ implementation of the Convention’s provisions. Nine to ten country reviews are issued each year. This 8^th annual progress report represents an independent assessment of the status of OECD Convention enforcement, based on reports from our national chapters in 37 OECD Convention countries (excluding Iceland and Russia). Countries are classified in four enforcement categories this year: Active, Moderate, Little and No enforcement.

TI opined in its report that “The UK Government must strengthen its anti-bribery effort by ensuring that the Serious Fraud Office (SFO) has adequate resources to investigate and prosecute bribery”. Although IT noted that under the Bribery Act, prosecutions had increased over the past year, “cutbacks to the SFO could see a decline in future UK enforcement. The Government has cut more than a third of the SFO’s budget in the last four years, hampering the prosecutor’s ability to tackle complex and damaging bribery cases.” Chandu Krishnan, Executive Director of Transparency International UK, was quoted in a Press Release as stating, “If the Government is serious about fighting corruption, it should not be cutting resources for enforcing the legislation designed to do just that. We must ensure that the SFO is not outgunned by those it should be prosecuting, who incidentally can usually afford the best legal advice available. The SFO should never be in a position where it is unable to investigate and prosecute cases due to a lack of resources.”

The Court Finding – Bribery as a (legal) way of doing business?

As reported in a Bloomberg.com post by Leonid Bershidsky, entitled “Russian Graft Goes Legit in London”, a London court recently found that influence-peddling in Russia is an “internationally recognized business arrangement.” In a recent decision, London’s Commercial Court found that the legal Russian concept of “krysha” where a “powerful person, often a government or law-enforcement official, who defends their interests and protects them from predators in return for a piece of the action” can be enforced in a English civil court. Bershidsky wrote that “Flimsy as the arrangement sounds, it’s how business is still often done in Russia when the help of a government official or facilitator is needed. I have personally seen such schemes in action. A private businessman, who is to all intents and purposes the owner of a business, takes on a raking bureaucrat as a silent and undocumented partner. The bureaucrat is not allowed to own his stake officially. He relies on his influence to guarantee that the businessman won’t ignore the arrangement.”

The plaintiff had sought to enforce a “krysha” arrangement where there was no written contract. The Court did not hold that such payments were bribes, corruption or otherwise illegal, but instead held there was not sufficient evidence of a binding contract. The invidious of this arrangement is clear in that money is being paid for ‘influence’ and such payments are kept “off-books” via an undeclared ownership structure. In other words, about as many Red Flags as you can get. If such arrangements are legal in Russia, why are they not anywhere else in the world?

All of the above may leave many compliance practitioners scratching their heads and wondering what is going on in the UK. Hopefully there will be some clarity, for the better, in the coming months.

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

Final Jeopardy and July 1, 2011

It’s Final Jeopardy and the category is “Compliance”. As your company’s Compliance Officer you are positively salivating at the prospect. So you go all in and bet everything you have on this last question. You stand abated as Host Alex Trebek poses the following question: “Which two countries had anti-corruption laws go into effect on July 1, 2011?” The Union Jack is firmly planted in your mind (if not a picture of the Bribery Act guys) so you confidently write down “What is the United Kingdom…” but then you realize you cannot think of that second country. You stumble and as the iconic tick, tock of the Final Jeopardy theme runs down…all you can think of is one of the BRIC countries. You know you are close but then the buzzer sounds. You dejectedly show your final answer and and Alex says, “Sorry, but it is the UK and Ukraine.”

So why couldn’t you think of the answer? It might be that corruption is so endemic in Ukraine that is difficult to imagine the government would have the brass to tackle the problem. In 2011, Ukraine ranked number 152 out of 182 countries listed on the Transparency International Corruption Perceptions Index (TI-CPI). You recall that corruption in the Ukraine actually got worse from 2010 when the country ranked 134 out of 178 countries listed on the TI-CPI. Perhaps you recall that corruption has been termed “Problem No. 1” for the country and that even the President of Ukraine has called corruption in his country, “a shameful phenomenon.”

Nevertheless you take your winnings from your second place finish in Jeopardy and go home to find out more this new law. In your Google search you find a law entitled, “On the Prevention and Counteraction against Corrupt Practices”. In your research you find that the Ukraine law has three main components: (1) it defines corruption and corruptive defenses; (2) it sets forth the relevant persons who may be held liable for corruption offenses; and (3) it imposes restriction on these relevant persons, while also setting out the liability factors.

Corruption and Corruptive Offense

Corruption is defined as the use of authority to offer, grant or receive improper benefits as well as requesting such activity. Corruptive offense is defined as an intentional act, not only involving governmental officials, as in the US Foreign Corrupt Practices Act (FCPA), but also between private actors, as is prohibited by the UK Bribery Act. The law includes the offering, granting or receiving of improper benefits, either directly or through a third party.

Parties Covered by Law

The Ukraine law has the same public/private dichotomy set forth in the UK Bribery Act. It defines government officials as those in both the federal, state or local authorities but adds an additional category of person equal to governmental officials. This new category includes officers of public law legal entities who receive wages or a salary from the state, even though they may not be a ‘governmental official’. Both of these categories of persons are covered regarding restrictions imposed as measures aimed at preventing and counteracting corruption.

Restrictions and Liability Factors

Not only can such persons, as noted above, not accept gratuities but their immediate families cannot profit from their positions. Lastly these restrictions hold for up to one year after such persons may have left the government. In addition to these restrictions, the following also apply.

• Gifts and Hospitalities – A person covered may not receive any gift in exchange for any decision, act or non-act. However, the law does allow a one-time gift, restricted to a value of 51% of one month’s salary. It should be noted that there were no restrictions on hospitality, such as travel, accommodation or meals.
• Special Screening – The law requires that all job applicants must declare any criminal history and make an annual declaration of property and income. However, there are notable exclusions to this requirement.
• Financial Control – With the annual declarations, as noted above, the information will be made publicly available. Government officials must also declare any foreign banks accounts they or their immediate family members may hold.
• Reporting Requirements – Government officials just declare all charitable amounts which they receive as gifts allowed under the law.
• Conflict of Interest – A covered official must take action to prevent any conflict of interest from arising but if such conflict does arise, it must be immediately disclosed.
• Code of Conduct – The law requires that a written professional ethics standard exist.
• Duty to Report Corruption – All persons covered by the law have a duty to report any corruption of which they may become aware. The law also has whistleblower protection.

You have now completed your review of this new Ukrainian law. As a Compliance Officer, you are pleased that Ukraine has entered the group of nations fighting corruption. You only wish you would have known about the law when it became effective and you would have not humiliated yourself on Final Jeopardy.

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The blog was based upon the article, “Ukraine’s New Anti-Corruption Law: Will it Really Stop Corruption in Ukraine?” by James T. Hitch, III and Yuliya Kuchma, published in the Fall 2011, Volume 45, Number 3 edition of The International Lawyer.

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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, 2012

Apollo 1 and a Compliance Dozen – How to Design a Program for Foreign Business Partners

Friday, January 27 was the 45^th anniversary of the Apollo 1 disaster. As reported by Brian Vastag, in an article in the Washington Post entitled “45 years after America’s first space tragedy, lessons linger”, it was a “launchpad fire which killed three NASA astronauts during testing of the then-new Apollo capsule. Reviews found that the early design of the craft was fatally flawed. Faulty wiring probably sparked the blaze that killed Roger Chaffee, Gus Grissom and Ed White. Among other problems, engineers saved weight by filling the capsule with pure, low-pressure oxygen instead of air, which is 80 percent inert nitrogen.”

One of the clear pieces of guidance from the Department of Justice (DOJ) is that a ‘tick-the-box’ compliance program is not only insufficient; it will not protect a company if a Foreign Corrupt Practices Act (FCPA) violation is discovered. However, many compliance practitioners do not know what should be analyzed regarding foreign business partners. I recently attended the ACI FCPA Boot Camp in Houston, home of the Johnson Space Center. One of the presentations dealt with how to design an overall program to evaluate, contract with, and manage foreign business partners. Furthermore, the presentation focused on how to assess the information obtained through the due diligence process. The presenters discussed a 12 point evaluation process for reviewing, assessing, then contracting with and managing foreign business partners. The steps are as follows:

1. Consider reputation for corruption in the country. You clearly need to review information from governmental organizations, such as the US Department of Commerce and State. A widely used source is from non-governmental organizations, such as Transparency International. Additionally, there are private sources such as World Check’s Country Check and the FCPA Database that you can use to review and determine a country’s overall reputation for corruption.
2. Competence of foreign business partner. This is a two-part analysis. It includes a review of the qualifications of the candidate for subject matter expertise and the resources to perform the services for which they are being considered. However, it also in includes an identification of the representative’s expected activities for your company.
3. Determine the integrity of the foreign business partner. There are several different methods that can and should be employed for this inquiry. Initially there should be an internal point of contact with the potential foreign business representative who can be used to obtain documents and financial, commercial and compliance references. After obtaining this initial information, you should review US and non-US restricted party lists and other media/internet searches. Next you should, at a minimum, obtain comments back from all references and if needed interview these references. Lastly, you should consider conducting an interview with the candidate. This can be done in house or through a company which specializes in investigations.
4. Identify relationships between agent and foreign governmental official. This inquiry requires a detailed review of the ownership and officers/directors and key employees of the foreign business partner. You will need to obtain and review entity information and documentation. If this is in a foreign language you will need to have it translated. One last point here is that you may now need  to look at customers as well to ascertain past and present relationships with government agencies.
5. Business justification for use of agent and reasonableness of compensation. Here you should begin the entire process by requiring the relevant business unit which desires to obtain the services of any foreign business partner to provide you with a business justification including current opportunities in territory, how the candidate was identified and why no currently existing foreign business relationships can provide the requested services. Your next inquiry should focus on the terms of the engagement, including the commission rate, the term of the agreement, what territory may be covered by the agreement and if such relationship will be exclusive.
6. Ensure that answers provided by the representative or business partner to due diligence questions are accurate and complete. This is the old Ronald Reagan maxim of ‘trust but verify’. You must verify information received from the prospective foreign business partner with interviews of business references and background searches.
7. Ensure compliance with local laws. This means that both the relationship that you envision is legal within the foreign jurisdiction and that the foreign business partner will comply with all local laws.
8. Integrate FCPA contract safeguards. You will need to incorporate the DOJ required language, listed in its 13 point minimum best practices compliance program. These compliance terms and conditions are found in Attachment C of all Deferred Prosecution Agreements (DPAs), entered into by the DOJ since at least November, 2010.
9. Provide for continuing oversight. After you have performed your due diligence, evaluated it and then entered into the contract for services, now the real work begins. You must manage that relationship. I suggest that you do so through a business unit sponsor for all foreign business partners. Such person must be assigned to and be responsible for ensuring continuing oversight of the foreign business partner.
10. Maintenance of books and records. This requirement also has two parts. Clearly your company must maintain appropriate internal controls over all its foreign business partners but your foreign business partner must also maintain such accurate records. I would go further to add that you should audit these records to ensure compliance.
11. Seek guidance from DOJ. As I mentioned above there are several different resources available to the compliance practitioner for information relating to foreign business partners. These include the minimum best practices as set forth in Attachment C to each DPA; DOJ Opinion Releases; Securities and Exchange (SEC) enforcement actions. Also remember your company can avail itself of the Opinion Release procedure and request guidance from the DOJ via that mechanism.
12. Use consistent standards and common sense. You should not check your common sense at the door when you become a compliance officer. The surest way to get into trouble is by ignoring your own internal warning signs. If a relationship feels bad to you, or something does not quite ‘smell right’ about a proposed foreign business partner, listen to that sensation. It may be a situation where more due diligence is required or a situation where you should walk away. Additionally, you should use consistent terms and conditions across industries and services, such as with customs brokers and freight forwarders.

The Apollo 1 tragedy still haunts NASA today. Vastag noted that “The tragedy is still etched on NASA’s collective psyche.” One NASA veteran, Travis Thompson, worries that the commercial companies which now lead most of American’s space efforts “have not absorbed the prime lesson of Apollo 1 — that bad design begets tragedy.” The 12 point program set out above will help your company to work through any issues with foreign business partners and by following it, you may well prevent your company from having its own compliance failure.

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

The End is Nigh for Facilitation Payments – Get Ahead of the Breeze

Last summer, an article was published in the University of Pennsylvania, Journal of Business Law, entitled “The OECD’s Call for an End to the ‘Corrosive’ Facilitation Payments and the International Focus on the Facilitation Payments Exception under the Foreign Corrupt Practices Act”. It was authored by Jon Jordan, Senior Investigations Counsel, in the Foreign Corrupt Practices Act (FCPA) Unit of the Securities and Exchange Commission (SEC). In this article, Jordan reviews, at length, the creation of the facilitation payment exception to the FCPA and the international criticism of the US position by the Organization of Economic Co-operation and Development (OECD), Transparency International, the World Economic Forum and TRACE International. The article also contains a discussion of the hidden costs to US companies which still allow facilitation payments under their company compliance regimes. I found this article to be an excellent review of the issue of facilitation payments and a useful guide to the compliance practitioner on how to navigate this knotty problem.

Costs of Facilitation Payments

1. The Bull’s Eye

Jordan notes that the cost of making facilitation payments is often higher than simply the (purportedly) small dollar amount. He believes that once a company starts down the road of making such payments, it may well lead “to higher costs imposed on those companies that choose to engage in that type of activity.” He quotes Alexandra Wrage, President of TRACE International, that having a corporate policy of allowing facilitation payments is like “putting a bull’s eye on your company’s forehead” as the payment of facilitation payments sets “a permissive tone, which leads to more and greater demands.”

2. Books and Records Issues

A second reason detailed by Jordan is the hidden intra-corporate transaction costs in making facilitation payments. There are a “complex matrix of domestic and foreign anti-bribery laws that companies must navigate when making facilitation payments, and steering through that matrix can be a compliance nightmare and a costly legal undertaking.” The clearest example of this situation is the UK Bribery Act, which has no exception for facilitation payments. If your company has a UK subsidiary, or any employees who are UK citizens, you must carve out an exclusion for them from your facilitation payment exception under your FCPA compliance policy. Got that? So not only must you have an entire carve out in your compliance protocols, your internal accounting system, which is required under the FCPA to record internal controls, you must also make sure that no UK citizen or person otherwise under the jurisdiction of the UK Bribery Act, makes such a claim for reimbursement under your company policy.

 3. Customers

The same is true for large UK based multi-national companies with which your company might transact business. The most obvious example in the energy arena is BP, which not only bans facilitation payments, but requires that any company which provides services for them ban facilitation payments made while doing work for or performing services on BP’s behalf. So think through how you would train your employees on how to properly make and record facilitation payments under your FCPA compliance policy with the HUGE EXCEPTION of when they might be performing some work under the 5 year Master Services Agreement with BP. It’s an administrative nightmare.

Is it Legal to Bribe?

Jordan also brings up the issue that there is not any country in which facilitation payments to public officials of that country are permitted under the written law of the recipient’s country. Accordingly, even if a particular facilitation payment qualifies for an exception of the FCPA, it, nevertheless, is likely to constitute a violation of local law – as well as under anti-bribery laws of other countries that also might apply simultaneously – and thus exposes the payer, his employer and/or related parties to prosecution in one or more jurisdictions. While enforcement to date in this area has been limited increased global attention to corruption makes future action more likely. Countries that are eager to be seen as combating corruption are prosecuting the payment of small bribes with greater frequency. Remember the hellish example of UK citizen Bill Smith, who was sentenced to two years imprisonment in an Afghanistan prison for making a ‘facilitation payment’ to get his company’s vehicles out of a Kabul impoundment lot. Apparently, even Afghanistan will fight the corruption of its own government officials, particularly if the fight involves a foreigner.

You Don’t Need a Weatherman

Jordan concludes by stating, “The facilitation payments exception has become a dinosaur remnant of a bygone era…” He advises US companies to get ahead of this issue and ban such payments in their company compliance programs now. This is sound advice. I would, however, add one additional reason for such advice, which is foretold in the intro paragraph to this article.

Who does the author work for and where does he work? Let’s recap: The SEC in the FCPA Unit. The article clearly states, “The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement of its employees…and do not necessarily reflect the views of the Commission…” Did I mention who the author works for and where he works? You don’t need a weatherman to know which way the wind blows and the direction of that breeze you feel at your back about now is clearly running against allowing the facilitation payments to continue.

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

Transparency International 2011 Bribe Payors Index Report

Last week Transparency International (TI) released its Bribe Payors Index 2011 (Index). It represents the fifth such report issued by TI, the most recent previously released in 2008. In the introduction, TI says that the Index “ranks 28 of the world’s largest economies according to the perceived likelihood of companies from these countries to pay bribes abroad. It is based on the views of business executives as captured by Transparency International’s 2011 Bribe Payers Survey. The countries and territories ranked in the Index cover all regions of the world and represent almost 80 per cent of the total world outflow of goods, services and investments.” It also relates the perception of bribery “across business sectors.”

TI released the report because it believes that “bribery has significant adverse effects on public well-being around the world. It distorts the fair awarding of contracts, reduces the quality of basic public services, limits opportunities to develop a competitive private sector and undermines trust in public institutions. Engaging in bribery also creates instability for companies themselves and presents ever-growing reputational and financial risks. This is particularly relevant in light of recent anti-bribery reforms in a number of key countries around the world, such as in China and the UK.” It ends with its recommendations which both the private sector and governments can do to help lessen or eradicate the “prevalence of foreign bribery around the world.”

The survey for the Index asked more than 3,000 business executives (Respondents) worldwide about their views on the extent to which companies from 28 of the world’s leading economies engage in bribery when doing business abroad. The score for each country is based on the views of the business executives who had come into contact with companies from that country. At the bottom of the list were companies from Russia and China which were perceived to be “the most likely” to engage in bribery abroad.

The Index had five key findings.

• There was clear evidence of bribery between private companies. More than one-third of the respondents in the Index reported that to help their companies grow business they were prepared to offer cash payments, gifts or hospitality to help win business. More ominously, more than one quarter of the respondents reported that they did not “trust their management to behave ethically.”
•   There was no improvement seen since the previous index released in 2008. When looking at changes on a country-by-country basis, no country has seen a change in its prior score from 2008. India’s score improved the most with an increase of 0.7, but it still remains near the bottom of the table.
•   The business integrity of a company is generally related to the perceived business integrity of its home country. An important first step in the fight against foreign bribery is that the home country government “must have an effective anti-corruption system in place. Home governments must set an example to companies by prohibiting corruption within the public sector and upholding high standards of integrity with no impunity.” In order to change the behavior of companies, one of the things needed is a strong legal framework in their home country making such conduct illegal.
•  Companies from China and Russia were perceived as the most likely to pay bribes. TI has particular concerns with the reported findings regarding Russia and China as both of their economies have grown rapidly over the past decade. This gives their actions wide implications beyond their domestic economies. Further bribery and corruption by companies from Russia and China “are likely to have a substantial impact on the societies in which they operate and on the ability” or other companies to compete fairly in those countries.
•  While the payment of bribes is prevalent across all business sectors it is perceived to be the most prevalent in the public works and construction sectors. TI notes that the public works and construction sectors are usually involved in high-value investment and significant government interaction and regulation, “both of which provide opportunities and incentives for corruption.” Further, the public works and construction sectors are also “particularly important from a development perspective, as they require decisions to be made with respect to the use and ownership of a country’s core resources and infrastructure.” This means that the public works and construction sectors will have significant consequences for the well-being of future generations of the countries in which they are involved. With bribery seen as widespread in public works and construction sectors, “countries working with foreign companies should be conscious of bribe paying and not tolerate unethical practices.”

The Index ended with recommendations for both companies and governments. While I found some of the recommendations for both groups unrealistic, I do believe that several are realistic and can be reached so that a company can remain competitive.

For companies, such recommendations include:

• Bribery and corruption risks must be assessed across companies’ entire supply chains;
• Companies should undertake due diligence, as appropriate, in evaluating prospective contractors and suppliers to ensure that they have effective anti-bribery programs;
• Companies should make known their anti-bribery policies to contractors and suppliers and contractually require equivalent standards”; and finally
• Companies should empower whistleblowers who experience or witness bribery and corruption through an effective and, if appropriate, anonymous whistleblower mechanism.

For governments, such recommendations include:

• Strengthening of national anti-bribery and anti-corruption legislation, including the banning of all facilitation payments; and
• Making illegal private sector bribery.

I found the TI Index report to be quite enlightening and useful. It will help inform the compliance practitioner on both the underlying legal basis of many international anti-bribery and anti-corruption initiatives and provide concrete steps to build or enhance a compliance program around. Its larger role may be to inform government regulators on companies from countries listed in the Index or market sectors which may be more prone to bribery and corruption. For laws which are both supply and consumer side based, such as the UK Bribery Act, it may point regulators to companies and sectors which may well bear scrutiny for companies over which they hold jurisdiction.

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

TI Guidance on Anti-Corruption and Anti-Bribery Due Diligence for M&A Transactions – Part II

Transparency International (TI) recently released a consultation draft of its White Paper entitled “Anti-Bribery Guidance for Transactions”. In Part I we discussed the risks to companies involved in international mergers and acquisitions. The TI White Paper notes that anti-corruption and anti-bribery due diligence is “often not undertaken, neglected, or allocated insufficient time and resources.” In Part II we will discuss the due diligence process suggested by Transparency International for such transactions.

Aims of Due Diligence

The TI White Paper begins by listing what TI believes to be the core aim of anti-corruption and anti-bribery due diligence. This core aim is to assure that the business to be acquired is sound and not distorted by bribery and its apparent business value is not a product of bribery. To accomplish assurance the acquiring company should identify the risks of corruption and bribery for the target through indicia such as countries of areas of geographic operation, transactional markets and any business partners. There should also be an evaluation of the adequacy of the target’s company’s anti-corruption and anti-bribery program and any corruption or bribery exposure that could cause the transaction to be aborted or modified.

Organizing for Due Diligence

TI next identifies three groups which should be organized for the due diligence. Each group has separate responsibilities and reporting lines which must be clearly delineated. These groups include:

(1) Internal Team. The Internal Team should will include some or all of the acquiring company’s internal corporate functions: the portfolio management team: a due diligence team if it exists: the internal company support functions of finance, general counsel, compliance, corporate affairs; and the appropriate approval and oversight bodies including investment, audit or other committees, executive committee, partners or the board.

(2) External Advisors. The External Advisors will include outside legal counsel, accounting and other forensic outside advisors that specialize in anti-corruption and anti-bribery issues.

(3) Internal Approvers. These Internal Approvers will include the Board of Directors or Partners who will be ultimately responsible for ensuring that their own company has implemented adequate anti-corruption and anti-bribery due diligence procedures during the transaction. These governing bodies must receive the investment and due diligence reports and are required to review these carefully and query management as necessary to check that due diligence has been carried out to a proper extent in assessing corruption and bribery risks.

Integrating Due Diligence into the Transaction Process

1.         Initiating the process

TI stresses that anti-corruption and anti-bribery due diligence should begin at the start of the process. It is not something that should be rammed in during the tail end of the process. TI advises there are four immediate actions regarding anti-corruption and anti-bribery due diligence which should begin when transactional due diligence commences. These four steps are:

1. The acquisition team communicates the launch of the project to the relevant internal teams and external advisers;
2. Initial meetings are held with the functions including a cross functional meeting;
3. A timetable with milestones is developed – the time allocated for completion will vary widely with each situation but adequate time should be allocated to the anti-bribery due diligence; and
4. The information needed for due diligence is scoped and prioritized striking a balance between the time schedule, resources available for due diligence, the willingness of the target to undergo detailed scrutiny and the need to ensure that issues are not overlooked.

2.         Initial screening

TI advises that the acquiring company should not rely upon any other due diligence work. The risk approaches and risk circumstances for each transaction are never the same. Each potential investment is a fresh start and must be analyzed separately and individually. Although the TI White Paper suggest that this step be carried out by external advisors such as a law firm or consulting company that specializes in anti-corruption or anti-bribery work, I believe that many companies have sufficient internal resources available to them with the expertise to handle this step.

TI specifically advises the following steps for initial screening. They include:

• An understanding of the target company’s approach to anti-corruption and anti-bribery and its specific program to prevent; detect and remediate the same.
• An assessment of the commitment of the target company’s Board of Directors and leadership to integrity and the entity’s anti-corruption and anti-bribery emphasis. (It’s ‘Tone at the Top”)
• Identification of any apparent anti-corruption and anti-bribery exposures or risks through a frank discussion with the management of the target company.

TI concludes by noting that if the anti-corruption anti-bribery risks are high and remediation does not seem an option, “this may lead to the proposed investment being dropped at this stage” before a more detailed investigation is undertaken.

3.         Detailed analysis

While my experience in Mergers & Acquisition (M&A) work is that your opportunity for investigation may end with Step 2 above due to the time constraint on any transaction, TI advocates a more detailed analysis at this point. TI envisions that this more detailed analysis would occur after an agreement in principle is reached but before the execution of a binding contract. Here TI sets forth several detailed steps that the acquiring company can engage in. They include:

• A business case analysis will be made including a detailed review of the target company’s markets and competitors’ activities; this should include whether corruption and bribery is a potential factor.
• The management of the target company starts work to prepare the required information which may be considered by the purchaser.
• A detailed due diligence analysis should be carried out by the due diligence team and/or its advisers to examine in detail the anti-bribery program of the target, assessing its quality and risks of corruption and bribery – this review should include external information from a wide range of sources.
• Interviews and site visits should be conducted by the Internal Team though some of this may be carried out by external advisers.
• External sources can be interviewed to obtain information. External sources could be customers, suppliers, industry experts and embassy officials.
• Support functions will review the results of due diligence and give their opinion to the acquisition or portfolio management team. The functions can include legal counsel, compliance officer, corporate affairs, and any other relevant functions as well as external advisers.
• Where the risk is judged to be unacceptable the proposal may be dropped at this stage.
• As this stage involves detailed examination of the target, consideration should be given to appointing a forensic firm which is a specialist in the UK Bribery Act and Foreign Corrupt Practices Act (FCPA). The firm should research and identify relevant information for analysis. This will include detailed scrutiny of books and records including a ledger analysis in sufficient detail to be able to examine line entries which could be problematic.

4.         Decision

The Portfolio Managers or M&A team should next prepare its report for the Acquisition Committee or equivalent body. The report should include a review of the due diligence findings related to bribery, any identified issues and how these could be mitigated, including discussions with the relevant authorities. Where the risk is judged to be unacceptable the purchaser must decide whether it should now withdraw from the planned investment. If the risk is deemed to be high there should be at least an outline of the remediation plan going forward, including how the target company’s anti-corruption and anti-bribery program can be brought to the required adequate level, risks remediated, contracts potentially renegotiated and re-tendered, and how any corrupt employees and associates will be removed from the target company.

5.         Post-acquisition integration

The Johnson and Johnson (J&J) Deferred Prosecution Agreement (DPA), released in April, 2011, provides a company with breathing space to move forward with a plan and remediation of an acquired company. This allows an acquiring company to think of due diligence and remediation as a single continuum and not as a series of bi-lateral continuums. To the extent possible, a company should conduct a pre-acquisition FCPA audit of the target company and post-acquisition a full FCPA audit within 18 months and training of all relevant personnel and business representatives within one year of acquisition.

The TI White Paper also suggests that due diligence procedures continue beyond the point of acquisition. Once the purchase or investment is completed, further due diligence will be carried out with the advantage of greater access if it is a majority investment. At this stage, further bribery risks may be identified in which case remedial action will be needed. If bribery is discovered at this stage then it will be necessary to report this to the legal authorities. If such issues are identified quickly after acquisition this will make it easier to resolve them with the relevant authorities.

The key appears to be that a company should follow the time strictures of the J&J DPA and timely and completely report any discovered violations to the relevant regulatory body, whether it be the US DOJ or the UK Serious Fraud Office.

6.         Continuing monitoring

The TI White Paper concludes this section by stressing the need for ongoing monitoring. Both the UK Bribery Act and FCPA speak to continuing monitoring, whether in the form of ongoing monitoring or ongoing assessment. Principle Six of the UK Bribery Act’s Adequate Procedures discusses the need for ongoing monitoring and review. The Principle states “The commercial organisation institutes monitoring and review mechanisms to ensure compliance with relevant policies and procedures and identifies any issues as they arise. The organisation implements improvements where appropriate.” The reasons for this continued monitoring are to ensure that if external events, like government changes, corruption convictions, or negative press reports occur, an appropriate compliance response is triggered. Assistant Attorney General for the Criminal Division of the US Department of Justice, Lanny Breuer, indicated that such an external verification or assurance of the effectiveness of a compliance program is a key component to assist a company in maintaining a ‘best practices’ FCPA compliance program. He noted that it is through a mechanism such as an ongoing assessment that a company could continue to evaluate its own compliance program with reference to compliance standards which are evolving on a world-wide basis.

As with all TI White Paper’s, this one is a wealth of information for the compliance practitioner. This White Paper lays out one method for thinking through and organizing your anti-corruption and anti-bribery due diligence team for any transactional work. The White Paper also provides to compliance practitioner the specific steps to take in your due diligence and the questions to ask and what to look for. Lastly, the White Paper lays out a way to think through your presentation to management. It is a welcomed addition to the TI library of anti-corruption and anti-bribery White Papers and other materials.

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

TI Guidance on Anti-Corruption and Anti-Bribery Due Diligence for M&A Transactions – Part I

Transparency International (TI) recently released, in draft form for consultation, a White Paper entitled “Anti-Bribery Guidance for Transactions.” Although this version was preliminary draft, available for a commentary period and the final version is to be released later in October, 2011, the guidance provided is well worth reviewing and will be of great use to any company engaged in international transactions. We will therefore review this document over two postings. In Part I, we will review the risks to companies involved in international mergers and acquisitions. In Part II, we will discuss the due diligence process suggested by Transparency International for such transactions.

The TI White Paper suggests that there are greater forces driving compliance than simply compliance with anti-corruption and anti-bribery laws such as the Foreign Corrupt Practices Act (FCPA) and UK Bribery Act. A company engaging in an international acquisition should also strive to avoid “the potential financial reputational damage that may come from investing in or purchasing a company associated with bribery [or corruption]. TI suggests the following should be actively explored:

• Has bribery taken place historically?
• Is it possible or likely that bribery is currently taking place?
• If so, how widespread is it likely to be?
• Does the target have in place an adequate anti-bribery program to prevent bribery?
• What would the likely impact be if bribery, historical or current, were discovered after the transaction had completed?

Financial, legal or reputational risk can have a significant impact the valuation or a transaction or its desirability. The White Paper sets forth the following potential impacts for a purchaser or investor of anti-corruption or anti-bribery risks during due diligence.

	Legal Risk	Financial Risk	Reputational Risk
Current bribery and/or corruption in target company discovered during transaction	High	High	Medium
Current bribery and/or corruption in acquired company discovered in post-transaction	High	High	High
Historical bribery and/or corruption discovered during transaction	High to low depending on jurisdiction	High to low depending on jurisdiction	Low to medium
Historical bribery and/or corruption in acquired company discovered post-transaction	High to medium depending on jurisdiction	High to medium depending on jurisdiction	High to medium

The White Paper lists some of the specific consequences where investments are made in a company which has a history of bribery or corruption.

• Both the target company and the acquiring company may place themselves (and their respective Boards of Directors) at risk of criminal or civil fines and penalties.
• The market value of the target company may be overstated and hence damage the overall financial position of an acquiring company. Conversely, such conduct may diminish the asset value and returns for a target company.
• The business instability brought by such conduct. This can include aborted business deals where both sides work long and hard only to have the transaction fall apart near the end of the process.
• The acquired business may not simply be dysfunctional but acquiring such a business may also introduce a culture into the acquiring company which will negatively impact it and bring about employee de-motivation.
• Even if there are no individual criminal actions brought against target or acquiring company employees, there can be a long period of disruption due to lengthy and costly investigations and the attendant reputational damage and media attention.

However, the White Paper also speaks to several positive benefits from appropriate due diligence. These include:

• Management quality indicator which will assess the positive qualities of the target company, including the quality of the target’s management and its overall systems, including books and records. TI believes that the evidence from due diligence of anti-corruption and anti-bribery programs is an indicator of overall management quality.
• The mitigation benefits available if a bribery incident is discovered. Under the UK Bribery Act, if a company has “Adequate Procedures” it may have a defense to a claim of violation of the Act. Under the FCPA, evidence of a best practices compliance program can be used in mitigation of any alleged violation of the FCPA.
• The reputational gain which an acquiring company may be able to gain with regulators or investors if it can show integrity and responsibility during the due diligence process.
• Lastly an acquiring company can go a long way in meeting investor expectations in the area of Environmental, Social and Governance (ESG) risks, which can include corruption and bribery, during M&A transactions.

These factors listed by TI in its White Paper provide the compliance practitioner strong ammunition when confronted with a management which fails to understand the need for a robust due diligence in a mergers and acquisition transaction. The White Paper does not focus on the regulatory aspect but more on the market reasons for engaging in the appropriate anti-corruption and anti-bribery due diligence. This White Paper continues the trend which emphasizes the business reasons for compliance and we find it a welcome addition to the vast TI store of White Papers and other guidance for the compliance practitioner.

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

We’re No. 1: What Level of Due Diligence Should You Perform?

New Zealand is generally recognized as having some of the lowest instances of corruption across the globe, at least that is the perception. Over the past 3 years it has either been Number 1 or led outright the Transparency International Corruptions Perceptions Index with scores of

• 2010-9.3
• 2009-9.4
• 2008-9.3

It was, therefore, with some surprise that I came across a story referred to in yesterday’s Corruptions Currents blog by the Wall Street Journal (WSJ), on a website in New Zealand, Stuff.co.nz, entitled “NZ firms linked to money laundering” authored by Michael Field.

The article reported that companies created in New Zealand had been linked to “Russian crime, a Mexican drug cartel and Romanian extortion.” Additionally it reported that certain companies created in New Zealand had been tied to a company alleged to have smuggled arms into North Korea. These were accomplished by the creation of New Zealand shell companies which were used to move monies through to avoid detection.

The article reported certain international criticisms of New Zealand corporate registration protocols. The Canadian Financial Transactions and Reports Analysis Centre, “identified the “exploitation of New Zealand’s weak company registration laws” as a problem. International expert Martin Woods was quoted in the article as saying that shell companies were “ideal vehicles for money launderers, tax evaders and arms traffickers”. But the topper is the following line, “The government admits there is a problem but says it has had other priorities” but we do note that this final quote is not attributed.

The problem all of this raises for a compliance practitioner here in the US is how to evaluate a company for due diligence purposes? The Transparency International Corruptions Perceptions Index is a generally recognized index that many companies rely on to set the appropriate level of due diligence. New Zealand, with a sterling score of 9.3 or 9.4 and a ranking of Number 1 over the past three years, is a country that may be perceived to have one of the lowest levels of corruption in the world. However, the article in Stuff.co.nz demonstrates the need for active and strong due diligence in all places across the globe.

The article reports that one individual was, at one point, listed as a Director of over 300 New Zealand formed companies. Another person, listed as the Director of the New Zealand company alleged to have been involved with the shipment of arms to North Korea was “convicted of 75 breaches of the Companies Act for giving false addresses on registration forms”. Both of these examples cited in the article should give pause to companies when they set their due diligence levels. A traditional Level One US/UK database search may not be enough to protect your company.

You may need to move to a more sophisticated search such as one which makes a database search for in-county records. It is certainly important to know if and when a person holds multiple Directorships in various and not obviously related companies. This should raise a very big Red Flag.

The moral of this story is that due diligence is not a rote exercise. Care must be given in all phases. Simply because you are doing compliance due diligence for Foreign Corrupt Practices Act (FCPA) issues does not mean you can ignore money laundering and export control issues. I have written on compliance convergence and heard my colleague Howard Sklar talk on this several times. Your compliance program needs to be cognizant and integrated to evaluate and manage these risks for your company.

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