Fcpa anti corruption due diligence - (pwc)

FCPA / Anti-Corruption
Due Diligence
What You Don't Know Can Hurt You
www.pwc.com

PwC
Agenda
1. Quick primer on FCPA
2. Current trends in Anti-Corruption due diligence
3. The need for Anti-Corruption due diligence (including the
importance of using accountants)
4. Scenarios – When things go wrong
5. Approach to Anti-Corruption due diligence
March 2013FCPA / Anti-Corruption Due Diligence
2

PwC
Objectives
• Understand deal considerations as it relates to FCPA
• Understand the nature and scope of diligence efforts in this area,
including the use of corporate intelligence to gather information on
foreign entities and individuals
• Express the value for our clients in proactively addressing risks in this
area
3

PwC
Quote from the new DOJ/SEC FCPA
guide
“…A company that does not
perform adequate FCPA due
diligence prior to a merger or
acquisition may face both legal
and business risks”
- A Resource Guide to the U.S.
Foreign Corrupt Practices
Act, p.62
4

PwC
Quick primer on FCPA
5

PwC
What is the FCPA?
6
Source: A Resource Guide to the U.S. Foreign Corrupt Practices Act
The FCPA is violated when
• An issuer or any of its officers, directors, employees, agents or
shareholders, a domestic concern, or foreign national pays, offers,
promises to pay, or authorizes/ approves the payment of
money or anything of value:
- To a foreign official, foreign political party, candidate for
political office, or official of a public international organization
- In a corrupt effort to obtain, retain, or direct business to any
person or obtain an improper advantage

PwC
Enforcement Snapshot
7
Source: Gibson Dunn FCPA Midyear 2012 Alert
2
7 7
18
20
26
48
23
11
3
5
8
20
13 14
26 25
12
0
10
20
30
40
50
60
2004 2005 2006 2007 2008 2009 2010 2011 2012
DOJ Actions SEC Actions

PwC
Landmark FCPA / Anti-Corruption Due Diligence
Cases
Industry Fine Amount
Oil & Gas Company $579 Million
Industrial Products & Manufacturing $26 Million
Technology $2 Million
Software & Technology $2 Million
8

PwC
FCPA / Anti-Corruption
Due Diligence Trends
9

PwC
Current Trends in FCPA / Anti-Corruption
Due Diligence
• Deal activity has begun to increase
• More and more companies are seeking guidance and assistance with
anti-corruption due diligence (even on smaller deals)
• Some acquirers are leveraging their internal audit teams to conduct
due diligence procedures
• FCPA / Anti-corruption due diligence efforts are slowly expanding
beyond more traditional high level risk assessments (at least initially)
to more robust (deeper dive) approaches
10

PwC
The need for FCPA / Anti-Corruption
due diligence (and the importance of
using accountants and researchers)
11

PwC
Why conduct FCPA/Anti-Corruption due diligence?
• FCPA due diligence is now a clear regulatory expectation (e.g. US,
UK, and more)
• Mitigate the risk of FCPA successor liability
• Mitigate the risk of penalties/fines
• Mitigate remediation costs
• Make any purchase price adjustments that may be required with
respect to tainted revenue streams
• Get a “jump start” on implementing your compliance program
12

PwC
Additional Benefits from Integrity Due Diligence
Protection of
business integrity
and reputation
Identification and
evaluation of
material risks
Responding to
evolving legal and
regulatory due
diligence
standards
Corroborate an
acquisition target’s
claims and
representations
Understand the
competitive
landscape
Cross-border
transactions
Assessment of
senior
management,
directors, agents,
vendors, etc.
Using publicly
available and discreet
resources, companies
can evaluate the
integrity and
reputational/
performance track
record of an
individual,
management group or
a corporate entity.
13

PwC
Regulatory Expectations
DOJ and SEC encourage companies engaging in mergers & acquisitions to:
• Conduct thorough risk-based FCPA and anti-corruption due diligence on
potential new business acquisitions
• Apply their code of conduct, compliance policies, and FCPA and other anti-
corruption procedures as quickly as practicable to new acquisitions
• Train all levels of employees, and business partners and agents when
appropriate, of merged or acquired companies on FCPA and other anti-
corruption laws, the company’s code of conduct and compliance policies and
procedures
• Conduct an FCPA-specific audit of all newly acquired or merged businesses as
quickly as practicable
In a significant number of instances, DOJ and SEC have declined to take action
against companies that voluntarily disclosed and remediated conduct and
cooperated with DOJ and SEC in the merger and acquisition context.
14

PwC
Regulatory Expectations
Recent FCPA deferred prosecution agreement
• The company should ensure that its target’s policies and
procedures regarding anti-corruption laws and regulations apply as
quickly as is practicable, but in any event no less than one year
post-closing, to newly acquired businesses, and promptly:
• Train directors, officers, employees, agents, consultants,
representatives, distributors, joint venture partners, and relevant
employees thereof, who present corruption risk to the company, on
the anti-corruption laws and regulations and the company’s related
policies and procedures;
• Conduct an FCPA-specific audit of all newly acquired businesses
within 18 months of acquisition
15

PwC
The Importance of Books & Records
• Page 40: "An effective compliance program is a critical component of an
issuer's internal controls“
• Page 56: "A well constructed, thought-fully implemented, and
consistently enforced compliance and ethics programs help prevent and
detect, remediate and report misconduct, including FCPA violations“
• Page 56: "DOJ and SEC… employ a common sense and pragmatic
approach to evaluating compliance programs, making inquiries related to
3 basic questions: designed well, applied in good faith and does it work“
• Page 62: "An organization should take time to review and test its
controls…“
• Page 24: "When expenses, bona fide or not, are mischaracterized…or
occur due to the failure to implement adequate internal controls, they may
also violate the FCPA’s accounting provisions"
16

PwC
The Global Importance of Integrity Due Diligence
17
Due diligence driver Reference Summary
UK Bribery Act Criminalizes the "failure to prevent bribery" and provides a defense of
having "adequate procedures" to prevent bribery. The fourth principle of
the MOJ guidance focuses on performing risk-based due diligence on
intermediaries.
OECD Good Practices
Guidance
Paragraph 6 The guidance provides a list of good practices to consider as part of an
effective compliance program, which includes documenting the risk-
based due diligence procedures performed, findings identified, and
approvals in hiring decisions and the performance of regular oversight.
World Bank Integrity
Compliance Group
Section 5.1 Requires compliance programs to include the performance of due
diligence on intermediaries for entities seeking to end a debarment or
conditional debarment.
TI Business Principles Section 5.2.2.1
Section 5.2.3.2
Section 5.2.4.2
Considered a best practices guide for designing and benchmarking
compliance programs, and includes the performance of due diligence on
intermediaries in its recommendations.
PACI Principles Section 5.2.2.1
Section 5.2.3.1
Section 5.2.3.2
Section 5.2.3.2.1
Section 5.2.4.2
Considered a best practices guide for designing compliance programs,
and includes the performance of due diligence on intermediaries in its
recommendations. This guidance is not a requirement, but merely a
guide for organizations of all sizes.

PwC
Accountants and Researchers vs. Counsel
• Two of the three provisions of the FCPA are “accounting” and
“internal controls” requirements.
• FCPA due diligence will involve a review of open source intelligence,
books & records, internal controls and transactional testing.
• Sample compliance sensitive accounts:
18
 Cash payments  Donations  License and permits
 Expense reimbursements  Charitable contributions  Bonus and incentives
 Commissions  Travel  Fines and penalties
 Entertainment/hospitality  Business development  Facilitation payments
 Gifts  Consulting  Customs Fees
 Freight forwarding charges  Legal fees  Commissions
 Discounts  Agency fees  Int’l payments.

PwC
Where is the risk?
Each of the country names mentioned indicate a publicly known FCPA case involving M&A.
19

PwC
FCPA / Anti-Corruption Due Diligence –
“Deal Killers”
• Most of the deals (even with red flags) go through.
1. Management has questionable integrity, background or associations
2. Company has poor ethical record or reputation (e.g. public censure,
allegations, or related law suit)
3. Third party sales consultants / agents / distributors used to win or retain
government business, assist for contract tenders with government
customers (e.g. lobbyists) or obtain licenses (e.g. customs agents)
4. Opaque ownership or corporate structure
5. Inadequate policies and controls on gifts and expenses
• Most of the cases fall into the category of “Fix and remediate” as opposed to
“Don’t do this deal”.
20

PwC
Scenarios – When things go wrong
21

PwC
Scenario 1
In performing the FCPA due diligence of a target’s
subsidiary in an African country , the company identifies
transactions which are recorded within the books and
records as “social payments.” According to target
subsidiary management, these “social payments” are
required under an existing contract with the African country
government. Upon further investigation the company learns
that certain of these expenses relate to t-shirts, which were
purchased by a third party and went to supporting the re-
election of the country’s President.
The target subsidiary under a contract was required to pay
“part of its profits as subsidies for development” of certain
“sectors” in African country , such as health, education, and
agriculture. These subsidies were referred to as “social
payments.”
During December 2000, at a Steering Committee
comprised of several senior officers of the Company and its
subsidiaries, an African Agent (which was employed by the
Company as well as the Head of State’s business advisor ),
and the Director General of a Government Agency,
demanded that the Company accelerate the “social
payments” and insisted that they be paid before the next
election in March 2001.
Among multiple payments at least a portion of the “social
payments” that the Company made through the Agent
were funneled to the re-election efforts of the
country’s President. For example, these funds (~2million)
were used to purchase T-shirts (and related items) bearing
a picture of the President and instructing citizens to vote
for him.
On March 25, 2001, the incumbent President was
announced as the winner of the presidential election. On
March 29, the Company met with the Agent and
representatives of the Government Agency at a Steering
Committee meeting. During the meeting, the Director
General of the Government Agency reaffirmed that the
Company’s management fee for operating the wireless
telephone system would be quadrupled (as the Company
requested to cover the increased social payments).
Consequences:
• Company made the target voluntarily disclose their
FCPA violations to the SEC and DOJ.
• Company backed out of the deal.
• Target paid $28.5M in fines/penalties.
22

PwC
1994 1995 1996 1997 1998
60%
stake
Additional
30% stake
Instructions: Stop
bribery without
adequately enhancing
internal controls
China
visit:
Cash
advances
FCPA compliance
training without
adequately
enhancing
internal controls
3rd party
agreement,
to win oil
field
contract
Money-
laundering
allegations
Bribery
continues
3rd party helps
win more
revenues
Continues bribes
using cash
advance
70%
stake
Bribery
continues
SEC charges FCPA
violations
Scenario 2
Penalty and fines –
$3 million
23

PwC
Scenario 3
• Company engages consultant to perform FDD, Tax and FCPA DD
• FDD and Tax teams completed field work.
• FCPA team learns of a 2% commission paid to a board member
towards revenue from one particular contract.
- The client is a State owned entity.
- This “2% arrangement” was a gentlemen’s agreement
• This was the single largest FDD adjustment.
• The client performed further due diligence, consulted local and FCPA
counsel and considered carving out a portion of the deal.
24

PwC
Scenario 4
25
• Due Diligence on a deal in China.
• During the due diligence procedures, commission payments on sales
to South America were identified as being made to a tax haven.
• The client consulted US and local counsel.
• The deal was completed after:
- Terminating certain business relationships.
- Making purchase price adjustments due to discontinued revenue
streams.
- Implementing their compliance programs.
- Building in reps and warranties in the SPA.

PwC
Scenario 5
26
• A major, US-based corporation sought to expand its operations into
Russia by partnering with a Russian conglomerate. A consultant was
hired to map the Russian conglomerate’s associations and its
ultimate beneficial shareholder, an influential Russian individual in
anticipation of a future material JV.
• During the course of the due diligence, offshore shareholders were
identified along with unusual bidding and licensing patterns.
• The consultant uncovered reports of an ongoing complex
investigation by the Russian government into one of its subsidiaries.
• The US company restructured its planned entry into Russia and
avoid significant reputational and product risk that could have led to
substantial material damage.

PwC
Approach to FCPA / Anti- Corruption
Due Diligence
27

PwC
Approach to FCPA due diligence
Stages
Tasks
Anti-
Corruption
Purpose
Corporate
Intelligence
Purpose
Pre-close Post-close
Strategy
Assessment
Options
Evaluation
Deal
Evaluation
Negotiation
& Close
Integration Transformation
Help to
understand
corruption
risks
Evaluate
geographical,
third party, and
business model
risks
Perform
compliance
program gap
assessments,
transaction
testing and
interviews
Evaluate
sufficiency of anti-
bribery reps and
indemnification
regarding
successor liability
Perform
compliance
program gap
assessments
Develop robust
compliance
programs,
trainings, and
develop strategy
Intelligence
on trends and
regulatory
environment
Preliminary
screening of
reputational and
operational risks
of initial targets
Reputational due diligence on the
potential target, key employees,
customers, and other third parties
Help clients develop a tactical CI
strategy to address third party risk
28

Level 1 (HQ)
•Gather open source
intelligence on target and
key execs
•Review policies, procedures
and other relevant dataroom
documentation
Level 2 (HQ+)
• Additional open source
research
• Gather relevant data and
perform analytics
Level 3 (Deep Dive)
•Enhanced corporate
intelligence
• Discreet inquiries with
relevant industry sources
•Review sales contracts, bid
and tender process, third
party agreements
•Consider email for e-mail
review
Sales Model / Industry
No third parties
Ltd Govt Touchpoints;
Agriculture, Hospitality,
Real Estate
Level 2
Level 2
Risk-
Measured
Diligence
Geography
CPI < 5.0
High likelihood
of Corruption
(135 countries)
CPI <3.0 –
Corruption Rampant
(84 countries)
Sales Model/Industry
Use of Third Parties;
Gov’t Touchpoints;
Energy, Financial Svcs,
Med Device, Pharma,
Telecom
Deal Dynamic
Ownership
Control
Level 3
Highest Risk
Geography
CPI > 8.0
Lower likelihood of
Corruption
(15 countries)
Deal Dynamic
Minority Stake
No Control
Level 1
Lowest Risk
Sales Model / Industry
No Third Parties;
Limited Gov’t Touchpoints;
Agriculture, Hospitality,
Real Estate
Financial, Operational and Compliance Risk Continuum
3
Pre-Deal Due Diligence Procedures
Level
of
diligence
increases
with
risk

PwC
Common Due Diligence Pitfalls
- Business unit selection not based on risks
- Potential red flags ignored
- Areas not audited: Routine payments, infrequent payments, payments made to
generate business, and travel expenses
- Sample selection not proportionate with risk
- Books and records provisions not respected
- Finding assumed to be an isolated incident
- Check the box approach
- Previous regulatory compliance issues (e.g. FCPA, Anti-Money Laundering, Trade
and Export, Piracy and Grey Market, etc.) documented in the public domain
- Excessive litigation matters
- Relationships with government officials
- Affiliations with organized crime, drug cartels, or other unsavory organizations
30

PwC
Closing Remarks
31

Questions?
This publication has been prepared for general guidance on matters of interest only, and does
not constitute professional advice. You should not act upon the information contained in this
publication without obtaining specific professional advice. No representation or warranty
(express or implied) is given as to the accuracy or completeness of the information contained in
this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its
members, employees and agents do not accept or assume any liability, responsibility or duty of
care for any consequences of you or anyone else acting, or refraining to act, in reliance on the
information contained in this publication or for any decision based on it.
© 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to
PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) which is a
member firm of PricewaterhouseCoopers International Limited, each member firm of which is
a separate legal entity.
Bryan Judice
bryan.judice@us.pwc.com
(213) 217-3182

Fcpa anti corruption due diligence - (pwc)

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Fcpa anti corruption due diligence - (pwc)

Similar to Fcpa anti corruption due diligence - (pwc) (20)

Recently uploaded

Recently uploaded (20)

Fcpa anti corruption due diligence - (pwc)