FCPA Compliance and Ethics Blog

September 6, 2011

Ride ‘Em Comrade: A Foreign Governmental Entity May Be Coming to Texas

I wrote, somewhat tongue in cheek, a post entitled “Take Me Out to the (FCPA) Ballgame” about an offer to purchase the Los Angeles Dodgers for a cash price of $1.2bn by a group which included “certain state-owned investment institutions of the People’s Republic of China”. If such a sale went through, I questioned whether such investment might make the Dodgers a governmental instrumentality, thereof, under the Foreign Corrupt Practices Act (FCPA). However, this question may become more relevant in the United States in another transaction that was announced last week which has come to fruition.

In a September 1, 2011 article in the New York Times, entitled “Memo to Exxon: Business with Russia Might Involve Guns and Balaclavas”, Andrew E. Kramer reported that Exxon signed a Joint Venture (JV) deal with the Russian state owned oil company Rosneft. Kramer stated that through this JV Exxon would explore for oil in the Russian sector of the Arctic Ocean. While the Wall Street Journal (WSJ), in an August 31, 2011 article, reported that financial terms for the Arctic Ocean JV had not yet been finally negotiated and on August 30, 2011, Newsday reported that Rosneft would own 66.7% of the shares in the JV. Additionally, Rosneft would “gain access to Exxon operations, including oil fields in Texas and the Gulf of Mexico.” The WSJ was more specific in noting that “Rosneft will be able to purchase stakes in some Exxon projects in the U.S., including deep-water Gulf of Mexico exploration and onshore oil fields in Texas. That would mark the first time a state-controlled Russian oil company acquired ownership stakes in U.S. oil and gas assets.”

I have not been able to find any report of the interest to be owned by Rosneft in the Gulf of Mexico properties or the onshore fields in Texas. Newsday reported that “Rosneft will be offered an equity interest in Exxon exploration projects in North America, including deep-water Gulf of Mexico and fields in Texas, as well as in other countries.” All of the above may well lead to some very interesting questions regarding the application of the FCPA.

I do not think that there would be any question that the FCPA would apply to the Arctic Ocean JV between Exxon and Rosneft. Under any analysis currently used, a more governmental ownership of 66.7% would be enough to make clear that the FCPA should apply. This would be true even under the analysis proposed by the US Chamber of Commerce to limit FCPA jurisdiction to any JV which has 50% ownership by a foreign government or foreign governmental entity.

The more interesting, or perhaps more troubling, question may well come from the offshore Gulf of Mexico properties or the onshore properties in the state of Texas. As stated in the Newsday article, Rosneft would be offered “equity interest” in these properties, but stated no amount. There was nothing to indicate whether Rosneft would be a passive investor or the lead developer in these properties. The Newsday article also reported that “The deal thus fulfills a demand for reciprocity often made by Putin, helping Rosneft, which already works with Exxon offshore Russia’s Sakhalin Island, toward its long-term goal of being a global energy major.” Is the fact that the Arctic Ocean deal required a reciprocal US based transaction of any import for an FCPA analysis?

At this point I would advise any energy industry legal or compliance officials in Houston to watch this matter closely. There may be (FCPA) implications from this deal all the way through the industry.

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 21, 2010

Establishing Relationships with Foreign Business Partners—Due Diligence, Due Diligence and then Due Diligence

There are several critical components in the selection, use and retention of any Foreign Business Partner, such as agents, resellers, joint venture partners or distributors. In view of the critical risks a US Company must manage when entering into a relationship with a Foreign Business Partner, the US Company should, prior to establishing the relationship, kick off the risk management process by initiating thorough due diligence on the proposed Foreign Business Partner. The due diligence process should contain, at a minimum, inquiries into the following areas:

• Need for the relationship with a Foreign Business Partner: The Company Business Team or Business Person should articulate the business case for the proposed Foreign Business Partner relationship. This must be approved by management before it goes to legal or compliance for review.

• Credentials: List the critical reasons for selection of the proposed Foreign Business Partner. This should include a discussion of the business partner’s background and experience.

• Ownership Structure: Describe whether the proposed Foreign Business Partner is a government or state-owned entity, and the nature of its relationship(s) with local, regional and governmental bodies. Are there any members of the business partner related, by blood, to governmental officials?

• Financial Qualifications: Describe the financial stability of, and all capital to be provided by, the proposed Foreign Business Partner. Obtain financial records, audited for 3 to 5 years, if available.

• Personnel: Determine whether the Foreign Business Partner will be providing personnel, particularly whether any of the employees are government officials. Obtain the names and titles of those who will provide services to the US Company.

• Physical Facilities: Describe what physical facilities will be provided by the Foreign Business Partner. Who will provide the necessary capital for their upkeep?

• Reputation: Describe the business reputation of the proposed Foreign Business Partner in its geographic and industry-sector markets.

These due diligence inquiries are required under the Federal Sentencing Guidelines and the guidance offered by the Department of Justice (DOJ) Opinion Releases and the publicly released Plea Agreements and Deferred Prosecution Agreements (DPA) entered into by US companies who admit to violating the Foreign Corrupt Practices Act (FCPA). This due diligence should be recorded and maintained by the US Company for review, if required, by a governmental agency. Some of the due diligence can be handled by the US Company’s in-house legal and/or compliance groups. However, it is recommended that for any high risk Foreign Business Partner, an outside forensic auditing firm and outside legal counsel be retained to conduct the due diligence investigations. This brings a level of expertise usually not available within a corporation plus an outside perspective less susceptible to in-company business pressures.

After this initial inquiry is concluded the US Company should move forward to perform a background check on a prospective Foreign Business Partner by using the following resources:

• References: Obtain and contact a list of business references.

• Embassy Check: Obtain information regarding the intended business partner from the local US Embassy, including an International Company Profile Report.

• Compliance Verification: Determine if the Foreign Business Partner, and those person within the Foreign Business Partner who will be providing services to the US Company, have reviewed or received FCPA training.

• Foreign Country Check: Have an independent third party, such as a law firm; investigate the business partner in its home country to determine compliance with its home country’s laws, licensing requirements and regulations.

• Cooperation and Attitude: One of the most important inquiries is not legal but based upon the response and cooperation of the Foreign Business Partner. Did the business partner object to any portion of the due diligence process? Did it object to the scope, coverage or purpose of the FCPA? In short, is the business partner a person or entity that the US Company is willing to stand up with under the FCPA?

After a company completes these due diligence steps, there should be a thorough review by the Board, or other dedicated Management Committee, on the qualifications of the proposed foreign business relationship partner. It is critical that the reviewing Committee is not subordinate to the US company’s business unit which is responsible for the business transactions with the Foreign Business Partner. This review should examine the adequacy of due diligence performed in connection with the selection of overseas partners, as well as the Foreign Business Partner’s selection of agents, subcontractors and consultants which will be used for business development on behalf of the US Company.

The steps listed herein do not include the use of, or continued management of, a Foreign Business Partner. These steps need to be taken by all US Companies entering into, or already engaged in, a relationship with Foreign Business Partners as the FCPA applies to all US Companies, whether public or private. Remember, due diligence, due diligence and once that has been completed; more due diligence.

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 can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2010

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