Fcpa Ma Slides Presentation Final V3


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FCPA Compliance in Mergers and Acquisitions

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Fcpa Ma Slides Presentation Final V3

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