FCPA / Anti-Corruption Due · PDF fileFCPA / Anti-Corruption Due Diligence What You Don't Know Can Hurt You

FCPA / Anti-Corruption Due Diligence What You Don't Know Can Hurt You

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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 2013 FCPA / Anti-Corruption Due Diligence 2

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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


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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 March 2013 FCPA / Anti-Corruption Due Diligence

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Quick primer on FCPA


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What is the FCPA?


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

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Enforcement Snapshot


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

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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


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FCPA / Anti-Corruption Due Diligence Trends


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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


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


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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


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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.


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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.



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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


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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"



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The Global Importance of Integrity Due Diligence


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.

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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:


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.

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Where is the risk?

Each of the country names mentioned indicate a publicly known FCPA case involving M&A.


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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”.


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Scenarios – When things go wrong


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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.

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March 2013 FCPA / Anti-Corruption Due Diligence

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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


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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.


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Scenario 4


• 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.

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Scenario 5


• 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.

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Approach to FCPA / Anti- Corruption Due Diligence


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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


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

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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


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Closing Remarks


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

[email protected]

(213) 217-3182

Documents

FCPA / Anti-Corruption Due · PDF fileFCPA / Anti-Corruption Due Diligence What You Don't Know Can Hurt You