M&A FCPA Compliance Risks

The risk of liability under the Foreign Corrupt Practices Act (FCPA) cannot be understated when undertaking corporate merger and acquisition activity.

In recent years, pressure to avoid corruptive practices within mergers and acquisitions has heightened, with due diligence becoming imperative for companies undertaking acquisitions outside the U.S. The DOJ’s Criminal Division Presidential Budget Request stated:

‘FCPA enforcement is consistent with Obama’s administration goals of promoting transparency, democracy, sustainable development and good governance’.

Through several administrative cease-and-desist proceedings, the U.S. Securities and Exchange Commission (SEC) has reasserted the importance of the Act. In particular, they have highlighted the importance of completing proper due diligence, so as to ensure both the determination of the deal’s true value and the extent to which compliance related steps must be implemented after closing.

Key Corruption Risks: Mergers and Acquisitions

There is a risk of corruption when undertaking any Merger or Acquisition. Crucially, if an acquired company was tainted by corruption prior to its acquisition, its new parent company will assume both civil and criminal liability for that corruption. Recent SEC findings have confirmed this. The cases of the Ball Corporation, Diageo and Watts Water Technologies, where companies were fined for failing to operate comprehensive compliance programs, all involved successor liability.

There is also a risk that a company enters into a merger or acquisition on the basis of financial statements which include revenue that has been corruptly obtained and is therefore not sustainable. When a party to a merger or acquisition has entered into corrupt behavior, the reputation of the law abiding party may come into jeopardy. This may impact upon sales figures. It may also impact upon overhead costs in the form of significant penalty charges.

Factors Leading to Increased Risk of Corruption: Mergers and Acquisitions

Increased global support for US investigations into foreign corrupt practices and global anti-corruption efforts should not be overlooked. However, where an international element is present, the risk of corruption is enhanced. For example, when joint venture deals are entered into in developing/emerging countries, investors are often required to incur additional risks by forming associations with local partners. In addition, undertaking financial transactions also carries increased risk in developing/emerging countries which may not have as robust financial regulatory framework as other jurisdictions. Thus, due diligence must be exercised when transferring money abroad as part of an international acquisition.

The way in which an acquisition is structured will also directly impact upon the risk of corruption. When acquiring a company, it is critical to ascertain whether a complete acquisition is required as opposed to an asset only purchase. Significantly, asset only purchases pose less corruption risks for the acquiring companies than whole company acquisitions. This is because when a company (as opposed to just its assets) is acquired, all historical liabilities remain.

Completing A Merger or Acquisition: Understanding the FCPA

As we have shared in greater depth in previous posts on this blog the FCPA applies to those with formal ties to the U.S. and also to those who violate the Act within the U.S. In broad terms, the act prohibits any payments to foreign officials where the motive is corrupt. Any payment must be intended to influence the recipient’s acts or decisions in order to assist with obtaining or retaining businesses with any party.

Crucial to FCPA compliance is the completion of pre-closing due diligence. This involves undertaking an investigation of the business that is being acquired prior to the signing of contacts. In such an investigation a company may refer to many documents including procurement reports, financial statements and compliance procedures.

Post-acquisition due diligence should also be undertaken. This involves an in-depth examination of the operational dynamics of the newly acquired company. It should build upon the pre-closure due diligence and may identify significant impact factors and potential areas for compliance enhancement.

Understanding Recent Developments

On 21st February 2012, the U.S. Chamber of Commerce Institute for Legal Reform and 36 other business organizations wrote to the DOJ seeking guidance relating to:

‘several issues and questions of significant concern to businesses seeking in good faith to comply with the FCPA’.

Queries related to compliance programs, instrumentalities of foreign government, parent company and successor company liability, the extent to which intent is necessary and issues surrounding gifts between parties.

Several informal meetings have since been facilitated with members of both private and public sector organisations in order to discuss topics relevant to the guidance. On 24th April 2012, the DOJ and the SEC attended a discussion with representatives from both the American Bar Association of International Law and the International Corruption Committee.

As a result of this consultation, it has been predicted that guidance will be produced as a joint issue between the SEC and the DOJ. As yet, however, it appears that no commitment has been made relating to the exact content of the guidance. Equally, no timescale for release of the guidance has been issued, nor is it clear whether the guidance will be developed using the notice and commitment process included within the Administrative Procedure Act.

The End is Nigh for Facilitation Payments – Get Ahead of the Breeze

Last summer, an article was published in the University of Pennsylvania, Journal of Business Law, entitled “The OECD’s Call for an End to the ‘Corrosive’ Facilitation Payments and the International Focus on the Facilitation Payments Exception under the Foreign Corrupt Practices Act”. It was authored by Jon Jordan, Senior Investigations Counsel, in the Foreign Corrupt Practices Act (FCPA) Unit of the Securities and Exchange Commission (SEC). In this article, Jordan reviews, at length, the creation of the facilitation payment exception to the FCPA and the international criticism of the US position by the Organization of Economic Co-operation and Development (OECD), Transparency International, the World Economic Forum and TRACE International. The article also contains a discussion of the hidden costs to US companies which still allow facilitation payments under their company compliance regimes. I found this article to be an excellent review of the issue of facilitation payments and a useful guide to the compliance practitioner on how to navigate this knotty problem.

Costs of Facilitation Payments
1. The Bull’s Eye
Jordan notes that the cost of making facilitation payments is often higher than simply the (purportedly) small dollar amount. He believes that once a company starts down the road of making such payments, it may well lead “to higher costs imposed on those companies that choose to engage in that type of activity.” He quotes Alexandra Wrage, President of TRACE International, that having a corporate policy of allowing facilitation payments is like “putting a bull’s eye on your company’s forehead” as the payment of facilitation payments sets “a permissive tone, which leads to more and greater demands.”
2. Books and Records Issues
A second reason detailed by Jordan is the hidden intra-corporate transaction costs in making facilitation payments. There are a “complex matrix of domestic and foreign anti-bribery laws that companies must navigate when making facilitation payments, and steering through that matrix can be a compliance nightmare and a costly legal undertaking.” The clearest example of this situation is the UK Bribery Act, which has no exception for facilitation payments. If your company has a UK subsidiary, or any employees who are UK citizens, you must carve out an exclusion for them from your facilitation payment exception under your FCPA compliance policy. Got that? So not only must you have an entire carve out in your compliance protocols, your internal accounting system, which is required under the FCPA to record internal controls, you must also make sure that no UK citizen or person otherwise under the jurisdiction of the UK Bribery Act, makes such a claim for reimbursement under your company policy.
 3. Customers
The same is true for large UK based multi-national companies with which your company might transact business. The most obvious example in the energy arena is BP, which not only bans facilitation payments, but requires that any company which provides services for them ban facilitation payments made while doing work for or performing services on BP’s behalf. So think through how you would train your employees on how to properly make and record facilitation payments under your FCPA compliance policy with the HUGE EXCEPTION of when they might be performing some work under the 5 year Master Services Agreement with BP. It’s an administrative nightmare.
Is it Legal to Bribe?
Jordan also brings up the issue that there is not any country in which facilitation payments to public officials of that country are permitted under the written law of the recipient’s country. Accordingly, even if a particular facilitation payment qualifies for an exception of the FCPA, it, nevertheless, is likely to constitute a violation of local law – as well as under anti-bribery laws of other countries that also might apply simultaneously – and thus exposes the payer, his employer and/or related parties to prosecution in one or more jurisdictions. While enforcement to date in this area has been limited increased global attention to corruption makes future action more likely. Countries that are eager to be seen as combating corruption are prosecuting the payment of small bribes with greater frequency. Remember the hellish example of UK citizen Bill Smith, who was sentenced to two years imprisonment in an Afghanistan prison for making a ‘facilitation payment’ to get his company’s vehicles out of a Kabul impoundment lot. Apparently, even Afghanistan will fight the corruption of its own government officials, particularly if the fight involves a foreigner.
You Don’t Need a Weatherman
Jordan concludes by stating, “The facilitation payments exception has become a dinosaur remnant of a bygone era…” He advises US companies to get ahead of this issue and ban such payments in their company compliance programs now. This is sound advice. I would, however, add one additional reason for such advice, which is foretold in the intro paragraph to this article.
Who does the author work for and where does he work? Let’s recap: The SEC in the FCPA Unit. The article clearly states, “The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement of its employees…and do not necessarily reflect the views of the Commission…” Did I mention who the author works for and where he works? You don’t need a weatherman to know which way the wind blows and the direction of that breeze you feel at your back about now is clearly running against allowing the facilitation payments to continue.


© Thomas R. Fox, 2012