FCPA Compliance and Ethics Blog

February 21, 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

February 18, 2011

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

Filed under: FCPA,Joint Ventures — tfoxlaw @ 9:53 am
Tags: , , , ,

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

 

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