Challenges of Conducting Due Diligence Investigations in China

The Challenges of Conducting Due
Diligence Investigations in China
Thomas Fox, Attorney at Law
© Thomas R. Fox / tomfoxlaw.com PC
All Right Reserved

Thomas Fox
Tom Fox has practiced law in Houston for 30 years. He now
assists companies with FCPA compliance, risk management and
international transactions. He was most recently the General
Counsel at Drilling Controls, Inc., a worldwide oilfield
manufacturing and service company. Before that he was
Division Counsel with Halliburton Energy Services, Inc. where he
supported Halliburton’s software division and its downhole
division, which included the logging, directional drilling and drill
bit business units.
Today, Tom writes and speaks nationally and internationally on
a wide variety of topics, ranging from FCPA compliance,
indemnities and other forms of risk management for a
worldwide energy practice, tax issues faced by multi-national US
companies, insurance coverage issues and protection of trade
secrets.

Doing Compliance

The FCPA Year in Review/
Anti-Bribery Leadership

5 Steps of Third Parties
Management

 Business Justification
 Qualification Questionnaire
 Due Diligence and its evaluation
 Contracting
 Management of the Relationship

Peter Humphreys
and Ms. Wu

Background
 Hired to investigate ‘sex tape’
 Not told about whistleblower or ABC investigation
 Investigation led to prominent Shanghai families
 Arrested in July 2013
 Alleged to have violated 2009 Privacy Law

The Allegations
 Not told what they were charged with until day of trial
 Alleged to have obtained about 250 pieces of private
information about individuals, including government-
issued identity documents, entry and exit travel records
and mobile phone records, all apparently in violation of
China’s privacy laws

The Trial
 Convicted at one-day trial
 Originally to be held in secret but held in public due to
US-China trial bi-lateral treaty
 Convicted for obtaining personal information as well as
government records on identification numbers, family
members, real-estate holdings, vehicle owner, telephone
logs and travel records

GSK Continues

GSK and China Business Unit
 GSK found guilty in one day trial
• $491MM fine
 Reilly and 3 others found guilty
 Suspended sentences

The Saga Continues
 Humphrey and Wu-found guilty in one-day trial
 Sex tape of GSK head in China
 Responses to Whistleblower
 GSK investigating corruption in Poland, Syria and other
countries
 SFO formal investigation

More to Come
 46 other GSK employees caught up in
prosecution
 Current and former employees sue for bonuses
 GSK under investigation in UK and US

Globalization of Enforcement
 SBM Offshore – DOJ defers to Dutch
prosecutors to permit $240 million settlement
 SFO and UK Bribery Act beginning to develop
some cases
 Brazil opens Embraer case for initial Clean
Companies Act prosecution

Enforcement Actions

Corporate-Alcoa
 Alcoa-$384MM fine, including $175MM in profit
disgorgement. 5th Largest fine of all-time. No. 1
in disgorgement amount
 One Guilty in UK, one prosecution dropped
 Fine could have been up to $1bn according to
DOJ

Corporate-HP
 $108MM total fine
 Multi-country bribery schemes. Complete
breakdown in internal controls
 Multiple enforcement tools
 Criminal Plea in Russia
 DPA in Poland
 NPA in Mexico

Avon
 2004 to 2008: $8 million systematic bribery scheme to
enter and maintain China door-to-door sales market. Up
to $750 in total costs
 Internal audit discovered bribery scheme
 Senior executives at Avon ordered sanitizing of audit
report and directed auditor to gather copies of initial
report to conceal
 Senior executives fired and will be prosecuted

Alstom
 Record settlement - $772 million
 $75 million in bribes to earn $4 billion in contracts
 Grand jury investigation was obstructed
 Individual prosecutions for Indonesia broken out to push
company to cooperate; DOJ was willing to keep
charging individuals
 Systemic breakdown and culture of corruption

The Esquenazi Decision and
Investigations

Court Creates Two-Prong Test
 Recognizing that the least is not dispositive, the
Court articled a Two-Prong Test:
Control Test
Function Test

Control Test
1) The foreign government’s formal designation of the entity;
2) Whether the government has an interest in the entity;
3) The government’s ability to hire and fire the entity’s principals;
4) The extent to which the entity’s profits, if any, go directly into the
governmental fisc;
5) The extent to which the government funds the entity if it fails to
break even; and
6) The length of time these indicia have existed.

Function Test
1) Does the entity have a monopoly over the function it exists to carry
out;
2) Does the foreign government subsidize the costs associated with
the entity providing the services;
3) Does the entity provide services to the public at large in the
foreign Country; and
4) Does the foreign government generally perceive the entity to be
performing a governmental function?

Opinion Release 14-02
 Focus on pre-acquisition due diligence in the mergers
and acquisition context
 Deep dive into questionable facilitation payments
 Investigation allowed disclosure, road map forward and
proper valuation
 No DOJ action if proper post-acquisition remediation
and integration

Business Requirements
for Compliance

Scott Killingworth and P2P
“Embodied in contract clauses and codes of conduct for business
partners, these obligations often go beyond mere compliance with
law and address the methods by which compliance is assured. They
create new compliance obligations and enforcement mechanisms
and touch upon the structure, design, priorities, functions and
administration of corporate ethics and compliance programs. And
these obligations are contagious: increasingly accountable not only
for their own compliance but also that of their supply chains,
companies must seek corresponding contractual assurances
upstream. Compliance is becoming privatized, and privatization is
going viral.”

Downward Push of Compliance
 Purchaser oversight of your compliance function
 Bank covenants requiring compliance program
 Private equity scrutiny and oversight
 D&O insurance coverage

Questions?

Thank-you for Participating in
Today’s Webinar
How you can reach Thomas Fox
Ph: 832-744-0264
www.tfoxlaw.com
tfox@tfoxlaw.com
Follow me at www.twitter.com/tfoxlaw.
Follow my blog at http://tfoxlaw.wordpress.com/
Contact us at i-Sight
j.gerard@i-sight.com

Challenges of Conducting Due Diligence Investigations in China

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