The Foreign Corrupt Practices Act (“FCPA”) became law in 1977, but not until the last decade have the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) aggressively enforced its provisions.At its core, the FCPA precludes the provision of anything of value to a foreign official to secure or retain business and requires companies to keep accurate books and records, including, ironically, of any such illicit payments.
Even companies with exemplary cultures and tremendous corporate integrity have fallen victim to corruption allegations inherited through acquisitions and other transactions, including joint ventures. These acquired problems all too often become a contagion that quickly infects the company and embroils it in years of costly government investigations. In the last several years, almost one-third of all FCPA enforcement actions have arisen in the context of successor liability.
As the United States, the United Kingdom and, increasingly, the world focus on anti-corruption prosecutions, it is imperative that companies transacting internationally perform due diligence to discover the extent of the target or business partner’s potential violations of the FCPA, UK Bribery Act, and other applicable laws.
The consequences of discovery by the government of corrupt activities can be devastating and ultimately negate the economic benefit of the merger. Among the potential consequences are:
- Financial penalties greater than the increased revenue from the acquisition;
- Costly implementation of controls making a business model no longer profitable;
- Loss of key, valuable personnel;
- Cancellation of significant contracts, including essential customer and vendor relationships; and
- Significant negative publicity.
While the discovery of activities potentially giving rise to corruption allegations may not be of such magnitude as to scuttle the acquisition, those discoveries may create opportunities to negotiate on price and terms. Appropriate due diligence may well create an opportunity to more accurately value the acquisition. The key elements of anti-corruption due diligence include:
- An assessment of the risk of historical and ongoing violations of the FCPA by the target;
- A determination of the sufficiency of the target’s anti-corruption compliance program; and
- An evaluation of the buyer’s successor liability risk.
The good news is that the government is willing to recognize pre- and even post-acquisition due diligence efforts in charging decisions and penalties. For example, DOJ “formally declined” to prosecute a parent corporation “for a number of reasons…,including because: (a) the parent corporation voluntarily provided information to the Department; and (b) the parent conducted extensive post-acquisition due diligence and training that gave rise to its discovery of the potential FCPA violations.” (Greg Andres, Deputy Assistant Attorney General, Criminal Division (June 16, 2011)).
The DOJ has provided guidance on post-acquisition diligence through its Opinion Procedure Release. Some of the essential steps set forth in Opinion Procedure Release No. 08-02 include:
- Develop a comprehensive, risk-based FCPA and anti-corruption due diligence work plan which organizes the due diligence into high, medium and low risk elements and which may be shared with DOJ depending on the immediate nature of concerns;
- Address the use of agents and other third parties;
- Investigate commercial dealings with state-owned customers, and joint venture, teaming or consortium arrangements; and
- Consider other government interactions, such as customs and immigration, tax, and licensing and permits.
The Opinion Procedure specifically contemplates regular reporting on progress to DOJ and the use of outside counsel and accountants. These considerations should be considered in every international acquisition, so that companies can consider the risks involved and can determine whether self-reporting to the government is appropriate.
Even when due diligence efforts don’t uncover corrupt activities, companies are well-advised to look for the indicia of strong anti-corruption efforts on the part of the target company and to immediately incorporate the acquired company into its compliance organization. The DOJ’s FCPA Resource Guide makes this clear:
DOJ and SEC evaluate whether the acquiring company promptly incorporated the acquired company into all of its internal controls, including its compliance program. Companies should consider training new employees, reevaluating third parties under company standards, and, where appropriate, conducting audits on new business units.
Taking quick action post-acquisition can also help insulate a company from liability from pre-acquisition wrongdoing where the target company was not subject to the FCPA pre-acquisition. Of course, if the acquisition is a company’s first international endeavor, it will need to build the requisite controls, compliance program and training regime.
One common misconception about the FCPA is that it applies only to publicly traded companies. However, the statute clearly applies to any U.S. “domestic concern,” 15 U.S.C. Section 78dd-2, and many FCPA compliance investigations have targeted non-public companies. The Resource Guide a “domestic concern” as:
A domestic concern is any individual who is a citizen, national, or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship that is organized under the laws of the United States or its states, territories, possessions, or commonwealths or that has its principal place of business in the United States.
Ibid. at p. 10.
Companies considering international acquisitions or acquisitions of domestic companies with international operations should check the calorie content before they bite down. A small investment in anti-corruption due diligence may well save millions on the purchase price or in fines and penalties avoided.
For additional information, please contact Catherine Hanaway or Joe Orlet.