2008summit Gregory Swinehart

7/31/2019 2008summit Gregory Swinehart

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Lessons for PEICross-Border

Investments.

Look Before you Leap:

Greg Swinehart, Partner

National Service Area Leader, Forensic & Dispute Services

Deloitte Financial Advisory Services LLP

April 9th, 2008


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Lessons for PEI Cross-Border Investments1 2008 Galaz, Yamazaki, Ruiz Urquiza, S.C.All rights reserved

Agenda

Enforcement Environment

Risk Factors for Latin America

M&A Due Diligence

Foreign Corrupt Practices Act

Business Intelligence

Anti Money Laundering and Office of Foreign Assets Control

Examples


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Increased Enforcement Environment

What we want to do is level the playing field for business to play by the rules,Alice Fisher, who heads the Justice Department's criminal division." - U.S. News& World Report article on how the Justice Department's corruption "crackdown"is affecting U.S. and foreign companies, August 13th, 2007

"FCPA issues had not historically been at the top of acquirers' due diligencechecklist, but in the wake of several FCPA actions that stalled or even shattereddeals, buyers are paying more attention to potential violations and the risk of

successor liability." - Mergers & Acquisitions Journal article on how the increasedfocus on FCPA have made "cross-border deals" more challenging, July 1st, 2007

The SEC is ratcheting up pressure on companies to reveal both publicly andto the government suspicious overseas payments by firms they are seeking to

acquire. Wall St. Journal article on Titan FCPA SEC settlement, March 2nd,2005

Due diligence during mergers is going to be a fruitful source of these (FCPA)

cases... - Richard Grimes, Former Asst Director, Enforcement, SEC, November2004, FCPA Conference, Washington, DC


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Risk Factors for Latin America

High Corruption Perception Index (CPI)

Many Developing Countries

High concentration of state-owned businesses

High Fraction of Natural Resource Industries


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M&A Due Diligence Checklist

Does company do international business?

Extent of international sales/what countries

Nature of sales use of consultants or distributors

What industry? Amounts of retainers, commissions and expenses paid to consultants in connection with

sales

Sales through foreign subsidiaries or joint ventures

Does company have FCPA compliance controls?

Is there a code of ethics and FCPA compliance policy which is distributed to allemployees and consultants?

What FCPA training is conducted, how frequently and which employees and consultantsare trained?

Is due diligence performed on consultants?

Is due diligence documented?


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M&A Due Diligence Checklist (2)

Does company have written agreement for every international consultant?

FCPA/anti-bribery representations and warranties

Provisions for short notice termination without cause and the right to terminate for cause

upon reasonable belief that a violation of the FCPA representations and warranties mayhave occurred

Prohibition on the use of subagents without the prior written approval of the company

Requirement of payment in the country where services are performed, i.e., a prohibitionon payments to third countries

Audit rights

What is the percentage of commissions paid to international consultants?

Records of disbursements

What level of approvals Audit trail of payments tied to invoices and approvals


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M&A Due Diligence - Foreign Corrupt Practices Act

DOJ/SEC unequivocal FCPA due diligence critical element of M&A

FCPA issues may arise at any point in the transaction, e.g. financial duediligence, anonymous allegations

May affect the timing of the transaction as well as the ultimate price paid for thecompany - reputational harm/disgorgement hard to quantify

Successor liability

Inaccurate FCPA representations in acquisition documents filed with SEC may

subject filer to liability under securities law anti-fraud provisions


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M&A Due Diligence Business Intelligence

In the context of an FCPA investigation, specialized due diligence should beconducted to help identify possible foreign government connections or linksbetween an entity or individual

Some of the types of information that can be discovered may include: Ownership interest in a company identifying any direct or indirect foreign government

ownership interests, including subsidiaries

If an individual shareholder, officer or director is (or is related to) a member of agovernment body or has any other government connections.

Other adverse connections or information regarding the subjects (criminal records, linksto organized crime)

Local public records should be gathered in relevant countries, even whererecords are not available via electronic sources

Particularly where public records are sparse, inquiries with human sourcesshould be made to assess business reputation of subject of investigation


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M&A Due Diligence Business Intelligence (2)

The availability of certain public records varies from country to country, but someof the typical public records may include:

Business registration filings

Business reports on an organization Civil and criminal litigation filings

Financial records

Media

Politically Exposed Persons (PEP) databases Regulatory databases, U.S. and foreign


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M&A Due Diligence Business Intelligence (3)

Traditional methods of due diligence alone can potentially lead to famous lastwords, such as:

The financial and legal due diligence process will pick it up

My banker/lawyer/accountant has checked them out with contacts overseas Their references checked out

Weve been over to visit them and everything seems fine

I don't want to hear bad news because its such a good deal

It is important to take steps to avoid these and other potential pitfalls


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M&A Due Diligence Anti Money Laundering

PEIs are exposed to regulatory and reputational risk whenever they expand intogeographies that are at a higher risk for money laundering and terrorist financing

Companies need to comply with the local and international AML regulations

depending on the jurisdictions in which they operate and their types of business.Examples of AML regulations: Bank Secrecy Act, USA PATRIOT Act, Third EUDirective, C-25, etc.

As part of the M&A due diligence, an assessment of the companys AML

activities should be conducted to determine if there is a robust, formal and writtenAML program that, at a minimum, addresses the following:

Governance, Organization Structure and Resources

Policies and Procedures

Know Your Customer (KYC) and Customer Identification Program (CIP) Requirements Transaction Monitoring, Currency Transaction Reports (CTRs) and Suspicious

Activity/Transaction Reports (SARs/STRs)

Independent Audit and Testing of the AML Program

AML Training of Employees


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M&A Due Diligence Office of Foreign Asset Control

The Office of Foreign Assets Control (OFAC) of the US Department of theTreasury administers and enforces economic and trade sanctions based on USforeign policy and national security goals against targeted foreign countries,terrorists, international narcotics traffickers, and those engaged in activitiesrelated to the proliferation of weapons of mass destruction.

OFAC violations carry both civil and criminal penalties. Civil penalty amount notto exceed the greater of $250,000 or an amount twice the amount of thetransaction that is the basis of the violation. Criminal penalty not to exceed

$1,000,000 and imprisonment of not more than 20 years.

OFAC has a wide jurisdiction and could be applicable to your company if yourcompany is involved in transactions that are:

Initiated in, completed in or passing through the USA;

Involving or facilitated by U.S. citizens; and

Involving any entity organized under U.S. law, their overseas branches or subsidiariesand any other entity otherwise controlled by such an entity.


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M&A Due Diligence Office of Foreign Asset Control (2)

As part of the transaction due diligence, an assessment of the companys OFACprogram must be conducted to determine if the company is OFAC compliant

Are all transactions and payments that fall within the OFAC jurisdiction covered by thecompanys OFAC program?

Is there a technology solution in place that checks all customer names and transactionsagainst the OFAC list using the most sophisticated matching algorithm?

Are there processes and workflow in place to review the potential matches anddetermine if the match is positive/negative?

Are potential transgressions being reported to OFAC within the 10 day limit?

Is there a governance structure in place that determines the ownership and control ofOFAC sanctions within the company?


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Examples

Paradigm (NASDAQ IPO)

Syncor International Corporation (Acquired by Cardinal Health Inc.)

ABB VETCO GRAY (Private equity purchase)

Titan Corporation (Acquisition dropped by Lockheed Martin following discovery ofFCPA violations)

Invision Technologies, Inc (Acquired by General Electric Company)


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Recommendations/Considerations

Know Your Market

Know Your Target/Partner

Guidelines/Expectations of an Investigation

Timing, Methodology and Sources are Key

Balance Desire with Facts


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Questions & Answers


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2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved.

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2008summit Gregory Swinehart