FCPA Compliance and Ethics Blog

April 11, 2014

Joint Venture Partners and the Company You Keep Under the FCPA

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

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

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

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

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

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

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

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

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

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

June 5, 2012

How to Influence FPCA Compliance as a Minority JV Partner

How does a company work towards achieving compliance with the Foreign Corrupt Practices Act (FCPA) in a Joint Venture (JV) or other business relationship where it holds less that 50% of the control? That question is often faced by US companies when they enter into a JV in many countries which require a majority of local ownership or even a 50-50 split in ownership. Some tactics that the compliance practitioner might employ were discussed in an article in the June issue of the Harvard Business Review, entitled, “The Perils of Partnering in Developing Markets”, in which Johns Hopkins (Hopkins) Medicine International Chief Executive Officer (CEO) Steven J. Thompson wrote about his company’s experience in partnering with a charity in Turkey to build and operate a “state-of-the-art medical facility.”

While not directly discussed in the article it is certainly worth noting that in partnering to create hospitals overseas, Hopkins is always dealing with the FCPA as health care services generally and hospitals particularly are run by the foreign government in which the hospital is located. However, the problems Hopkins encountered and some of the solutions provide excellent insight into compliance challenges that a company might well face when it moves into a developing market. Thompson began by noting that as a non-profit Hopkins always takes a minority interest or none at all. This requires Hopkins to operate not as typical JV or other type of partner but “more like consultants with a broad range of responsibility and high level of authority.” The other thing that I found quite interesting was that as a non-profit, the most important thing to Hopkins is its good name; in other words it is far more concerned about reputational damage than financial loss. Some of the key lessons learned were as follows.

Filling the Local Talent Gap

Even if the country’s laws do not require that local persons be the entity’s managers, most local partners insist upon it. Thompson has learned that fighting this “rarely pays out.” Instead Hopkins seeks to team its advisors with the local executives, so that the advisors will have the ability to influence both “process and culture.” Overtime, Hopkins has found that the top local managers cannot push as hard or as strongly for innovation and culture change so that the Hopkins team can begin to take over the top management functions.

A key component for long term success is training. This includes local training in all aspects of hospital management and financial operations. Additionally, Hopkins establishes a strong recruiting pipeline for bringing back to Baltimore, the home of Hopkins, so that they can be trained at and see how the facilities are run in the US.

When Best Practices Collide with Culture

In most medical treatment outside the US, the culture is such that a Doctors judgment is never questioned. This is quite different from the Hopkins experience in the US, where other providers of health care are empowered to challenge the decisions of senior physicians where a patient’s health may be at risk. The Hopkins approach when “confronted with a culture clash is to determine whether we really need to challenge the culture.” With this approach, Hopkins found that it could accomplish its goals, “within the cultural constraints” in which it operated. When it could not do so, it “seeded the staff with professionals who could lead by example” so that in the case of the culture of deference to Doctors whose authority was not challenged, senior nurses were brought in from countries where such a tradition did not exist. Once others saw that patient outcomes were steadily improved, “they began to come around and the culture of deference receded.”

Mitigating Risk

In many ways, I found the Hopkins experience in mitigating risk to be the most interesting. Here Thompson said that the pre-agreement due diligence process, which he termed “choosing the right partner and learning to read the signs from up-front negotiations are critical”, were two of the most critical factors. He identified factors such as foreign institutions which only desired short-term profit or were trying to capitalize on the Hopkins name as “anathema to success.” He wrote that these factors can be ascertained through long conversations with potential partners about goals such as sustainable quality and commitment rather than on financial returns alone. Mimicking the requirements under the US Department of Justice’s (DOJ’s) minimum best practices compliance program, Hopkins requires strong contract language regarding the commitments made by any foreign partner. Lastly, if a relationship begins to sour or otherwise have problems, Hopkins is not afraid to rethink its position or even end the relationship after appropriate consideration. To help facilitate this from the legal perspective, Hopkins requires a “termination for convenience clause” in its contracts.

Project Checklist

Another interesting aspect of the Hopkins approach was in the implicit use of risk assessment. Thompson included the below chart to illustrate “How Johns Hopkins Sizes Up International Risk”. I found that these concepts speak to an on-going approach to risk assessment so that the process is continuous and therefore allows for continuous improvement.

Evaluating the Opportunity

Getting up to Speed

Operating Over Time

Assess the potential partner’s willingness to commit resources. Engage experts to hire key personnel and to design processes. Stabilize processes and create feedback loops.
Assess regional constraints. Establish training and mentoring programs for local managers and professionals. Transfer more responsibilities to local managers.
Work with your local partner on a project plan and a business plan. Set up clinical, operations and financial performance metrics. Establish local education and recruitment pipelines.
Ensure that your local partner has a clear understanding of, and realistic expectations for the project. Establish quality, safety and efficiency processes. Establish regional marketing programs.
Set up a time for accreditation. Consider new initiatives and expansion.

If Trouble Arises

Thompson concluded is article with a list of action items that you can perform if there are signs of trouble. So, following McNulty’s Maxim No. 3 of “What did you do to remedy it?”, I list the following actions steps your company can take at three different stages of a JV relationship.

1. In the Evaluation Phase

  • If your concerns are modest, propose a smaller, several months-long pilot consulting project.
  • If your concerns are serious, you would walk away from the deal.

2. In the Start-Up Phase

  • Engage experts to hire the Key JV personnel and to design the appropriate processes.
  • Increase the number of ex-pat professionals involved in the JV.
  • Expand your support to local managers.
  • If warranted, revise strategic plans and consider replacing the onsite management.
  • If severe problems arise, consider scaling back or terminating the JV

3. As the Relationship Matures

  • Strengthen your training and mentorship.
  • Bring in subject matter experts (SMEs) to help solve defined problems.
  • Retool processes that may be falling short.
  • If required, reinstate key managers from your corporate headquarters or home office.
  • Freeze or reduce the scope of the JV’s activities until problems are solved.
  • Set up problems solving forums with partners in other countries.

Many US companies have struggled with how influence partners to comply with the FCPA in JV relationships. The Hopkins experience has some excellent steps that your company can take in the pre-formation stage, during contract negotiation, in post-execution contract management and then as the relationship matures. The process that Hopkins follows is one that clearly allows you to use influence, rather than the brute force of the majority right of control. It is a very good road map for you to consider and one that management should take a close look at when managing any overseas relationship.

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

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