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.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.
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Basic FCPA Prohibitions Who is liable under the FCPA?
• Domestic
Anti-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
• Foreign
Accounting / 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
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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 administration's 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)
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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)
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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
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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
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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.
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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.
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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
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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
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Haliburton 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
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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?
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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?
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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?
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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.
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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
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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
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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?
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M & A Due Diligence M & A Due Diligence
Ability to quickly find ties is critical in an M & A environment
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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.
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