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Fcpa ma slides presentation final

  1. 1. FCPA Risks in the Mergers & Acquisitions World<br />Michael Volkov<br />Partner<br />(202) 263-3288<br />mvolkov@mayerbrown.com<br />December 2010<br />
  2. 2. Overview<br />Overview of the U.S. Foreign CorruptPractices Act (FCPA)<br />FCPA Cases / DOJ Opinion ReleasesInvolving M&A<br />Lessons Learned <br />Pre-Acquisition Due Diligence Steps <br />2<br />
  3. 3. Basic FCPA Prohibitions<br />Anti-Bribery:<br />Domestic concerns (defined as a U.S. person or corporate entity) are prohibited from making corrupt payments or promises to pay foreign officials for the purpose of obtaining or retaining business<br />Accounting / Recordkeeping Provisions:<br />Internal control and recordkeeping provisions applicable to corporations whose securities are registered with the SEC, or who must file regular reports with the SEC<br />
  4. 4. Who is liable under the FCPA?<br />Domestic<br />All US “issuers” and private companies (“domestic concerns”)<br />Any US corporation or national or any foreign bribery-related conduct<br />US citizens or foreign nationals operating in the US or using instrumentalities<br />Foreign<br />Foreign corporations subject to SEC regulation (e.g., via ADRs) and using instrumentalities<br />All foreign corporations when in US territory, whether or not they use instrumentalities of interstate commerce<br />Includes directors, officers, employees, and agents of entities subject to the statute<br />4<br />
  5. 5. Increased and Aggressive FCPA Enforcement<br /><ul><li>Corporate mega fines
  6. 6. Obama administration's focus: "HIGH PRIORITY"
  7. 7. New and aggressive investigative tactics
  8. 8. Industry focus</li></li></ul><li>FCPA– Why Important? <br />“Foreign bribery is a law enforcement challenge of truly global dimensions. It is, as the Attorney General has said, a “scourge on civil society.” We in the Criminal Division combat foreign bribery each and every day. And as we go about our business, we are looking carefully at lapses in corporate compliance.” <br /> (Lanny A. Breuer, Ass’t Attorney General, Criminal Division. DOJ, May 26, 2010)<br />6<br />
  9. 9. The Numbers Tell the Story<br />[1] Gibson, Dunn & Crutcher, LLP Publication "2009 Year-End FCPA Update" (Jan. 4, 2010)<br />
  10. 10. Mergers and Acquisitions:FCPA Liability<br />Acquiring company may be held criminally liable for FCPA violations committed by target company BEFORE and AFTER closing – Successor Liability<br />Pre-closing due diligence is critical to assessing risks and avoiding liability<br />Due diligence should identify risks of potential FCPA violations<br />8<br />
  11. 11. Mergers and Acquisitions:Impact of FCPA Liability<br />Impact of FCPA violations on transaction structure, price, and need for additional warranties and indemnifications<br />Terminate or delay proposed deal<br />Corporate integration issues <br />Need to implement enhanced FCPA compliance program<br />Possible voluntary disclosure to Justice Department<br />Opportunity to resolve potential liabilities<br />Need to halt illegal conduct and dismiss officers and employees<br />9<br />
  12. 12. Basic Purchase Agreement ProtectionsAgainst FCPA Liability<br />Warranties and Indemnifications against possible FCPA violations<br />Participation in transactions permitted under local law<br />Absence of government owners in company<br />No corrupt payments were made to foreign officials<br />Books and records are complete and accurate<br />10<br />
  13. 13. FCPA Successor Liability for Mergers and Asset Sales<br />Successor liability generally attaches in stock transfer or merger because assets and liabilities of target company generally transfer to the acquiring company after closing<br />Successor liability may attach in asset purchase depending on extent of asset purchase and inquiry focused on whether business of target is continuing or if agreement specifies which assets and liabilities transfer Form will not trump substance and due diligence may just as critical as in stock acquisition. <br />11<br />
  14. 14. FCPA Successor Liability for Joint Ventures and Minority Stake Acquisitions<br /> For joint ventures and minority acquisitions, company can be held liable for future conduct of joint venture or majority partner. FCPA liability will depend on a governance test: how involved is the joint venture partner or minority owner in the governance of the joint venture or majority company – board members, voting rights. <br /> To minimize risk, party should promote FCPA compliance by requesting measures for good governance, accurate recordkeeping, and anti-bribery efforts; seek audit rights, anti-corruption representations, and written commitments to abide by anti-corruption laws .<br /> Even if not adopted, maintaining a record of such requests could help protect against or minimize FCPA exposure <br />12<br />
  15. 15. Recent Cases Involving Successor LiabilitySnamprogetti, ENI, Saipem<br />Snamprogetti: a subsidiary of ENI, engaged in bribery scheme for 10 years ending in 2004. In 2006, ENIsold Snamprogetti to another company, Saipem. <br />Four years later, in 2010, Snamprogetti was charged with FCPA criminal violations.<br />Snamprogettiagreed to $240 million fine, and ENIand Saipem were jointly liable for fine. <br />ENI, Snamprogetti and Saipemhad to institute a corporate compliance program. <br />13<br />
  16. 16. Recent Cases Involving Successor LiabilityAlliance One<br />Alliance One was formed in 2005 with merger of Dimon Inc. and Standard Commercial Corporation.<br />In 2010, DOJ brought criminal case against Alliance One for FCPA violations committed by foreign subsidiaries of Dimon and SCCBEFORE the merger.<br />Foreign subsidiaries entered guilty pleas; Alliance One is required to cooperate and retain an independent compliance monitor for 3 years. Alliance One settled civil complaint by disgorging $10 million. <br />14<br />
  17. 17. Successor Liability : Deal Terminated Lockheed and Titan <br />Lockheed and Titan: In 2005, while conducting pre-acquisition due diligence of Titan, Lockheed discovered bribe payments by Titan which were made to obtain telephony contract s in the Republic of Benin. <br />Out of concern for successor liability, Lockheed pulled out of deal.<br />15<br />
  18. 18. Successor Liability: Finding a Way Forward:GE and InVision<br />GE and InVision: In 2005, while conducting pre-acquisition due diligence of InVision, GE discovered potential FCPA violations surrounding InVision;s use of consultants to obtain contracts for explosives detection equipment in China, Thailand and Philippines. <br />GE went forward with the deal after rigorous due diligence, deal modifications, and requiring InVisionto make a voluntary disclosure to Justice Department.<br />16<br />
  19. 19. Due Diligence: General Considerations<br />Due diligence is not a legal defense but it can minimize risk of successor liability when coupled with acquiring company’s FCPA compliance commitment <br />Timing of voluntary disclosures should be carefully considered since DOJ involvement raises stakes<br />Due diligence has to be tailored to transaction – whether it is merger, asset acquisition, joint venture or minority stake purchase<br />Overall strategy should be flexible as information is learned<br />17<br />
  20. 20. What Does Due Diligence Require?<br />Little available authority on required due diligence steps – “an art, not a science”<br />Depends on the Business Combination and the Specific Facts<br />Educate diligence team on FCPA issues<br />Factor in necessary time for FCPA review – process likely will require phases of review<br />Follow-up on identified red flags and risk areas<br />Document due diligence steps<br />18<br />
  21. 21. What If Due Diligence Cannot be Completed Before Closing? 2008 Haliburton Precedent <br />In the face of legal obstacle to obtaining information from target oil and gas company, Halliburton went to the Justice Department to minimize its risk of FCPA liability<br />No Successor Liability With Stringent Conditions<br />Halliburton imposed FCPA compliance policy on the target company at closing and conducted post-closing FCPA due diligence inquiry and report the results <br />19<br />
  22. 22. Haliburton Due Diligence:DOJ Deadlines and Investigation <br />DOJ imposed strict timeline on Haliburton for post-acquisition due diligence over 180 days. <br />DOJ required Haliburton to conduct extensive post-closing internal investigation, including examination of relevant [target company] records, including e-mail review and review of company financial and accounting records, as well as interviews of relevant [the target company’s] personnel and other individuals.<br />20<br />
  23. 23. Haliburton Precedent: Can Similar Procedures be Used in Analogous Circumstances?<br />Party may seek accommodation when<br /> disclosure of certain information prior to closing could place target company at competitive disadvantage.<br />Significant time restraints require less thorough due diligence inquiry before closing<br />DOJ will impose conditions requiring acquiring company to disclose corrupt activity uncovered post-closing on strict timeline and to undertake a rigorous internal investigation. <br />21<br />
  24. 24. FCPA Due Diligence Inquiry:Basic Risk-Based Assessment <br />What countries does target company operate in and how do they rank on Transparency International’s Corruption Index?<br />What is level of corruption in each country?<br />Does target company sell to foreign governments?<br />Does target company’s business depend on licenses or other approvals from foreign governments?<br />Gather basic information about target company (Dun and Bradstreet. Department of State, Commerce Department, Treasury Department)<br />Try to determine whether relationships exist among target company personnel and government officials through family, friends, etc<br />22<br />
  25. 25. FCPA Due Diligence Inquiry:Basic Risk-Based Assessment<br />Does the Target Company have an FCPA compliance policy? Does the target company maintain compliance records?<br />Is the target company, or any of its competitors, suspected or under investigation for corruption?<br />Does the target company use third-party agents?<br />Any prior internal investigations?<br />Any prior corruption investigations of target company or any officers , managers or employees?<br />Does the company maintain hotline reporting system?<br />Does the company conduct FCPA training?<br />23<br />
  26. 26. Step Two: Focusing on Key Components(A) Financial Controls<br />Financial controls – what are basic financial controls?<br />How are financial controls maintained and structured?<br />Can system catch corrupt payments?<br />Who conducts financial audits? <br />What level of transactions do they examine?<br />Do they employ “materiality test?<br />How can adequacy of books and records be tested?<br />24<br />
  27. 27. Step Two: Focusing on Key Components(B) Third-Party Intermediairies<br />For third-party intermediaries, all red flag transactions must be investigated. <br />Basic questions must be answered. <br />How are they paid? What services do they provide? <br />How are expenses paid?<br />Are their books subject to audit by company? <br />Do they maintain copies of written retainer/consulting agreements? Do they contain FCPA compliance clauses? <br />What procedure for approval of third party contract? <br />25<br />
  28. 28. Step Two: Focusing on Key Components(C) FCPA Training<br />What type of FCPA training program?<br />Who is subject to training requirement? How often?<br />Does company obtain certifications from attendees?<br />Does company maintain records of FCPA training program?<br />Does training program distinguish between lawyers, accountants, and sales staff?<br />26<br />
  29. 29. Step Two: Key Components(D) Employee Discipline/Hotline Reporting<br />Does company have written employee discipline procedures?<br />Do procedures include discipline for corruption violations?<br />How do procedures address FCPA compliance?<br />Is compliance a factor in employee evaluation?<br />Does company maintain records of hotline reports?<br />If yes, reports should be reviewed.<br />27<br />
  30. 30. Step Two: Key Components(E) Overall Compliance Structure<br />Does company have designated compliance officer?<br />To whom does officer report?<br />How is compliance program structured and managed?<br />What documentation is maintained of compliance program?<br />What audits, if any, are conducted? How often? What areas?<br />How is compliance program structured to address identified risks?<br />28<br />
  31. 31. Step Three: Identifying Areas for Further Inquiry<br />After review of five components and documents, follow up interviews of staff should be conducted?<br />It is better to be safe than sorry – interview any potential areas for violations or deficiencies in financial controls, third-party reviews or overall compliance program<br />Leave no stone unturned and follow all reasonable leads<br />Even if transaction appears to be small, due diligence requires careful examination<br />29<br />
  32. 32. Step Four: Continuous Assessment and Due Diligence Flexibility<br />As more information is gathered, risks can be sifted and prioritized<br />As information paints picture, consider how to raise issues with target company<br />Identify how you want to handle potential FCPA problems, adopt strategy aimed at securing protections against liability, and implement as quickly as possible<br />Do not run to Justice Department. Voluntary disclosures are by means mandated and can raise more problems than warranted. Use as a strategy card to secure best position.<br />30<br />
  33. 33. Ryan MorganFCPA SpecialistWorldComplianceryanm@worldcompliance.com(305) 579-2298 x262<br />
  34. 34. Case Study: Elandia - Latinode<br />Elandia Acquired Miami Based Latin Node (Latinode) in 2007<br />After Acquisition, realized that Latinode had been involved in attempt to bribe executives at Hondutel, over $2 million in total<br />Initially $300k passed through consulting firms<br />A total of $1 million passed directly into FOs bank accounts<br />eLandia admitted later that they overpaid by $20 million due to legal fees, penalties,cost of labor, etc.<br />32<br />
  35. 35. M & A Due Diligence<br />United States– Background Check<br />Provides Identity Verification – name, address, phone<br />Check against criminal record<br />May/may not check sanctions list<br />Foreign Person/Entity Background Check<br />Identity Verification Details lacking<br />Publicly available data on criminal records scarce<br />Need for sanctions screening (OFAC, BIS) critical<br />Due to FCPA concerns, DD process needs to different<br />33<br />
  36. 36. M & A Due Diligence – Catering for your Anti Corruption Program<br />Critical first step – Negative Database Check<br />Verify person involved in transactions are not a foreign official<br />Verify company is not tied to a foreign government – owned or controlled by FOs <br />Verify 3rd party not investigated for corruption<br />*If any of the above provides a “hit” - may be enough to kill the deal<br />Next step – Evaluate risk of transaction to decide if EDD report is necessary<br />Deal Size<br />Geography<br />Industry<br />34<br />
  37. 37. M & A Due Diligence – Catering for your Anti Corruption Program<br />Details for your due diligence process:<br />Name<br />Location<br />Dates of Birth – Enforcement community use DOB as an identifier<br />Copy of photo ID<br />Passport number <br />National ID – Latin America <br />Timeframe is also critical, if this is a process to go on for months – do you have an ongoing due diligence process?<br />35<br />
  38. 38. M & A Due Diligence<br />36<br />Perform a “real time” check to find potential risk<br />Investigate “hit” to see if person is in fact your contact<br />
  39. 39. M & A Due Diligence<br />37<br />Ability to quickly find ties is critical in an M & A environment<br />
  40. 40. M & A Due Diligence<br />38<br />
  41. 41. FCPA Risks in the Mergers & Acquisitions World<br />Q&A<br />Ryan Morgan<br />FCPA Specialist<br />(305) 579-2298 x262<br />ryanm@worldcompliance.com<br />Michael Volkov<br />Partner<br />(202) 263-3288<br />mvolkov@mayerbrown.com<br />