While there has always been a need to conduct pre-transaction due diligence, particularly in high risk markets, today's risks and the regulatory and enforcement environment that accompany them have made the stakes higher than ever.

Changes in the application of pre-existing laws and programs include more aggressive enforcement of the FCPA and increased use of OFAC (Office of Foreign Assets Control) specially designated nationals programs. These changes, along with post-9/11 issues such as legal and reputational risks associated with conducting business with individuals and entities linked to the funding of terrorism, mandate more than a "check the box" level of investigation. These risks are not confined to a particular country or region but it is the Middle East that is identified, whether fairly or not, as the region that is most vulnerable to these problems. While the concept of due diligence may appear straightforward, the reality is that against this changing landscape, investigative findings are rarely black and white. As a result, fact-finding is only the beginning of the process as it is often the analysis and interpretation of those facts that is key when evaluating your risks.

Of course, in some cases, the facts speak for themselves. If you find that your local agent is paying government officials millions of dollars to win contracts for your company, you do not need any analysis to determine that you have a significant problem. In most cases however, things are not always so simple; take for the example allegations of terrorist funding. In many of these cases, there has been an allegation that the subject has been linked to charities that are suspected of contributing funds to support terrorism. On even the most basic level, these situations present some potentially thorny issues. Did the subject actually contribute to the relevant charities? If so, when did he contribute and did he know of the ultimate use of the funds at that time? Is the problematic link through some other association (e.g., the subject served on the board of an unrelated company with an officer of a relevant charity) and if so, is that link significant? Assuming that the subject was historically linked to a charity that was later blacklisted by OFAC, would the subject then be exonerated if that same charity was subsequently delisted by OFAC?

One also needs to consider the role of perception versus reality. In a recent matter, a US government committee issued a report harshly critical of a company for conducting business with a bank suspected of links to terrorist funding even though the bank in question was never indicted, designated a terrorist financier or sanctioned by any country. You may be able to refute every single allegation against your subject, but that may not help your reputation in the court of public opinion if, for example, your subjects have been widely identified as defendants in 9/11-related litigation. Also keep in mind that in the unfiltered world of the Internet, there is frequently an assumption of guilt until proven innocent.

Different but equally difficult questions can present themselves when dealing with sanctions-related issues. In August 2012, a new law was enacted that expanded the reach of U.S. sanctions against Iran by prohibiting foreign subsidiaries owned or controlled by US companies from transacting business with Iran or Iranian citizens. This means that it is essential to understand if your acquisition target has links to companies that have conducted business with Iran and if so, whether these links are through majority-controlled subsidiaries or through a relatively minor interest? It is also important to determine whether the business relationship with Iran was historical or is ongoing. If historical, it is equally important to document the nature of the relationship should it come under regulatory scrutiny.

Good business opportunities are plentiful in the region, but so are the potential pitfalls. Whether it is the threat of criminal prosecution for FCPA violations, substantial fines associated with breaking sanctions or reputational damage through guilt by association, the risks are very real and the damage to your company can be substantial. For these reasons, having as complete a picture as possible of your subjects - be they local agents, potential joint venture partners or acquisition targets - is essential before making any business decisions in the region.

Editor's Note: A correction was made to the digital edition of this article on Nov. 26, 2012 to address an error that was made in the print edition regarding the FCPA and OFAC.


Nicholas Peck heads Nardello's complex investigations practice. His investigative career spans more than 25 years in which he has held significant roles in several high-profile cases, including a two-year investigation of Saddam Hussein's financial network.

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