1. #ACIFCPA
ACI'sSummiton FCPARisksForPrivateEquity&
HedgeFunds
Sung-Hee Suh
Partner
Schulte Roth & Zabel LLP
Global Risk: How to Manage Corruption Risk for
Your Investments in High-Risk Regions
Erica Fung
Legal Counsel and Chief
Compliance Officer
KKR Asia Limited (Hong Kong)
Luz María Pineda Lucy
Chief Compliance Officer
Fondo de Fondos (Mexico)
May 21, 2014
Tweeting about this conference?
2. #ACIFCPA
Assessing Jurisdictional Risks
• Country scores and rankings are an
important component of risk assessment
• Transparency International's corruption
perceptions index measures the perceived
levels of public corruption
• Country scores:
0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80-89 90-100
Highly Corrupt ----------------------------------------------------> Very Clean
4. #ACIFCPA
Risks Based on Industry and
Local Market Conditions
• Target operates in heavily regulated industries
• Target has significant interactions with foreign
officials
• Target does significant amounts of business with
foreign governments
• Target requires significant foreign government
approvals, permits, licenses
• Target makes extensive use of Third Parties to
interact with government
5. #ACIFCPA
Target – Specific Risks
• Target has weak internal controls or an
ineffective compliance program
• Target lacks transparency in expenses and
accounting
• Target has unusually high levels of expenses for
marketing, gifts, travel, entertainment,
hospitality, etc.
• Target refuses to give FCPA certifications or
cooperate with due diligence
• Target refuses to provide information or disclose
beneficial owners, principals, partners, etc.
7. #ACIFCPA
Gifts
• Gift Guidelines Based Upon DOJ Opinions
• Should not be given in cash or other bearer instruments
• Should be appropriate for the occasion
• Must be consistent with the standards of professional courtesy
generally accepted in the relevant foreign country
• Should be of nominal value in the relevant foreign country
• Should be presented openly and with transparency
• Should be for official use rather than personal use, or given as a
token of esteem, courtesy, or in return for hospitality
• Must have bona fide business purpose
• Must be in good faith, without expectation of quid pro quo or
reciprocation
• Consider the circumstances of the
business relationship
• Is the foreign government entity about to award a contract?
8. #ACIFCPA
Gifts, Travel, Entertainment,
Hospitality
• All expenses should be accurately recorded
on the company's books and records,
subject to audit
• All expenditures should comply with:
• The company's policies and procedures
• All relevant laws in all applicable jurisdictions
• The policies and procedures and guidelines governing the foreign
government entity
• Consider obtaining authorization from the
legal/compliance department of the foreign
government entity
• Opinion from local expert and/or legal
counsel may be necessary or advisable
9. #ACIFCPA
Risks Posed by Third Parties
• Ways to mitigate potential liability arising
from acts of Third Parties (e.g., agents,
consultants, representatives, advisors,
introducers/finders, distributors,
contractors, JV partners)
• Look for "red flags"
• Conduct due diligence on Third Parties
• Document due diligence efforts
• Obtain written anti-bribery/anti-corruption certifications from
Third Parties
10. #ACIFCPA
Risks Posed by Third Parties
• Red Flags
• High-risk jurisdictions
• Above-market commission payments
• Unusual payment arrangements (e.g., cash, through multiple parties,
through multiple countries)
• Evidence of relationship with foreign government/foreign official
• Third Party was recommended by government customer
• Third Party is related to or closely associated with foreign official
• Refusal to give FCPA certifications or cooperate with due diligence
• Refusal to provide information or disclose beneficial owners,
principals, partners, etc.
• Negative background checks or internet/media searches
• Lack of transparency in expenses and accounting records
• Lack of qualifications or resources
• Vague contractual service agreements
11. #ACIFCPA
Exceptions & Affirmative Defenses
• Exception: Facilitation payments
• Small payments made to expedite performance of routine government action
• Limited to ministerial non-discretionary government functions
• Must be properly recorded on the company's books and records
• Illegal in most countries (e.g., Hong Kong, Mexico, United Kingdom)
• Affirmative Defense: Payments lawful under
the written laws of the foreign country
• Payments must be authorized by local law (extremely rare)
• Affirmative Defense: Reasonable and bona
fide business expenditures
• Must be directly related to promotion, demonstration, or explanation of
company's products or services or execution or performance of a contract
• Payments must be authorized by local law and company policy
12. #ACIFCPA
Foreign Laws
• Many countries now have laws
equivalent to or even more restrictive
than the FCPA
• Increased cross-border cooperation among government agencies
in different jurisdictions
• Increased enforcement activity by many foreign nations
• Risk of double jeopardy in multiple jurisdictions for the same
conduct as more countries enact and enforce their own laws
13. #ACIFCPA
Foreign Laws: Mexico
• The Federal Criminal Code and Criminal Codes of the
Mexican States prohibit the corruption of
government officials
• The Federal Anti-Corruption Law (2012) applies to all
persons and companies (whether Mexican or not)
that participate – as a shareholder, partner,
representative, attorney-in-fact, agent, advisor,
subcontractor, or employee -- in federal public
contracts in Mexico as bidders, suppliers, contractors
or concessionaires
• No exception for facilitation payments
14. #ACIFCPA
Tools and Techniques to Assess
Target's Compliance Program
• Review target's documents (e.g., books and records, relevant
agreements, material contracts, permits and licenses, etc.)
• Discuss bribery and corruption issues with representatives of
target
• Conduct personal interviews of specialized employees (and
perhaps Third Parties)
• Consider hiring a local expert
• A local expert or private investigation firm with access to
information or knowledge about the target and its principals can
be invaluable
• Local experts can advise on regulatory requirements, such as
what government approvals, permits, licenses are needed, how
they are obtained, and when renewal is required
• Apply due diligence to select the local expert
15. #ACIFCPA
Tools and Techniques to Assess
Target's Compliance Program
• Commitment from senior management ("tone from the top")
• Clearly articulated policies and procedures against bribery and
corruption
• Code of Conduct with strong internal controls
• Management oversight and accountability for compliance
• Adequate resources dedicated to compliance
• A risk-based approach, tailored to the company's needs
• Training for all directors, officers, relevant employees, and where
appropriate, Third Parties
• Third Party due diligence and monitoring of payments/relationships
• Disciplinary measures to punish noncompliance and incentives to
promote compliance
• Confidential reporting and internal investigations
• Continuous improvement via periodic testing and review
See FCPA Guidance, chapter 5
16. #ACIFCPA
The Due Diligence File
• Should be retained for at least five years
• May include the following:
• Results of background checks and internet/media searches
• Results from reputational assessments
• Due diligence questionnaires with responses
• Memoranda from interviews
• Reports prepared by local experts and/or legal counsel
• Other relevant documents
• Final report
17. #ACIFCPA
Documentary Protections
• Representations/Warranties that no unlawful payments have
been made by or on behalf of the target
• Representations/Warranties that any compensation provided
pursuant to the agreement is not for the use or benefit of foreign
officials
• No involvement of foreign officials in the transaction
• Covenant that FCPA-prohibited conduct will not be permitted and
that efforts will be made to prevent such conduct
• Agreement by target to provide periodic certifications of
compliance with such covenant
• Agreement by target and/or among key shareholders to take
certain remedial steps (e.g., adopt or improve FCPA policies post-
closing)
• Audit rights with respect to books and records of the target
• Indemnification rights in the event of a violation by the target
• Termination rights in the event of a violation by the target
18. #ACIFCPA
Post-Investment Compliance
• Factors affecting FCPA liability
• "DOJ and SEC evaluate whether the acquiring company promptly
incorporated the acquired company into all of its internal controls,
including its compliance program." See FCPA Guidance, page 62
(emphasis added)
• For FCPA violations that occur post-closing, the extent of investment
and degree of control will be important – but not necessarily
determinative – factors that regulators will consider in assessing
potential liability
• If an investment company's ownership interest in a portfolio
company is de minimis, the prospect that a regulator would seek to
hold the investment company liable for FCPA violations by the
portfolio company is remote
• However, there is no bright line test for when FCPA liability will
attach, and exposure to liability will turn on an analysis of all the
relevant facts and circumstances, including whether the investment
company knew, or should have known, of the unlawful payments
• Also consider reputational risk issues
19. #ACIFCPA
Recent FCPA Cases
• Azerbaijan Privatization Case
• In the 1990s, Azerbaijan sought to privatize its state-owned oil
company, SOCAR
• An investment consortium, organized by a Czech businessman
named Viktor Kozeny and including several U.S. investors, sought
to purchase SOCAR
• Kozeny orchestrated a scheme to bribe the Azeri president and
other senior government officials with hundreds of millions of
dollars in shares of stock, cash and other gifts
• Several U.S. investors were investigated and/or prosecuted as
part of DOJ's FCPA investigation
20. #ACIFCPA
Recent FCPA Cases
• Azerbaijan Privatization Case: United
States v. Bourke
• Bourke and others arranged and paid for medical care,
travel and lodging in the United States for the Azeri
president's son (a SOCAR official) and family
• Bourke did not pay bribes directly and lost $8MM on
deal
• Case turned on "conscious avoidance"
21. #ACIFCPA
Recent FCPA Cases
• United States v. Peterson (Morgan Stanley declination)
• Peterson was managing director of Morgan Stanley's Chinese real
estate investment and fund advisory business, which co-invested
with a Chinese state-owned entity in a Shanghai real estate deal
• In exchange for steering business to Morgan Stanley funds and
helping obtain requisite government approvals, the Chairman of a
Chinese state-owned entity received illicit payments
• Bribes took the form of "finder's fees" and secret real estate interests
• Peterson benefited personally from illicit payments
• Criminal prosecution based on theory that Peterson evaded
Morgan Stanley's "robust" internal controls
• Peterson sentenced to nine months in prison, plus monetary fines,
and permanently barred from the industry
• Morgan Stanley not charged
22. #ACIFCPA
Recent FCPA Cases
• Direct Access Partners ("DAP")
• DOJ and SEC have charged several executives and
employees of DAP, a broker-dealer registered with the SEC
• Case grew out of a routine SEC examination
• DAP brokered bond trades for two state-owned economic
development banks in Venezuela
• DAP directed kickback payments to a Venezuelan bank official
in exchange for steering bond trading business to DAP ("pay to
play")
• Bribe monies generated through intra-day "round trip"
transactions and mark-ups/mark-downs on the bond trades
• Scheme included sham "foreign finder fees"
23. #ACIFCPA
Recent FCPA Cases
• Hiring Relatives of Foreign Officials ("Princelings")
• JP Morgan Chase is reportedly under investigation for hiring children of
prominent Chinese officials and business leaders (JPMC "sons and daughters"
program)
• Goldman Sachs announced in its March 2014 10-Q that the firm is being
investigated for FCPA issues with respect to its hiring practices
• The government "princelings" probe has reportedly expanded to the
technology sector
• There is nothing inherently illegal about hiring family members of foreign
officials and numerous DOJ FCPA Opinion Procedure Releases have permitted
such relationships
• However, several FCPA enforcement actions have been based, at least in part,
on the hiring of family members of foreign officials
• United States v. Daimler Chrysler China, Ltd. (company made "a purported
commission payment to the wife of a Chinese government official at Sinopec")
• United States v. Siemens Bangladesh Limited (company allegedly paid $5K to the
daughter of a Bangladesh Telegraph Telephone Board official ostensibly to work as
an "engineer" on the project despite the fact none was needed and there was no
budget for the position)
24. #ACIFCPA
Conclusions
• When managing corruption risk for
investments in high-risk regions
• Conduct enhanced due diligence tailored to jurisdiction, industry,
target company's business and local market conditions
• Be vigilant about complying with relevant laws in applicable
jurisdictions and relevant company policies and procedures
• Consider hiring a local expert to better understand (and navigate)
the corruption risks unique to each region and industry
• Open up channels of communication
• Document your decisions
• Consult the Chief Compliance Officer and/or
legal department with any questions or
concerns
