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    Fcpa ma slides presentation final Fcpa ma slides presentation final Presentation Transcript

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