Steering Clear Of the Bribery Trap When Buying Abroad: Heads-up investigative work is needed to avoid stiff U.S. penalties stemming from bribes paid by foreign acquisition targets.

U.S. companies that expand into new global markets often find themselves in the murky waters of international business transactions. These sometimes uncharted waters can be made even darker by the Securities and Exchange Commission’s and the Department of Justice’s current aggressive enforcement of the Foreign Corrupt Practices Act of 1977 (FCPA), which heightens the legal risks associated with international mergers, acquisitions, and joint ventures. In brief, the FCPA imposes stiff civil and criminal penalties for bribing “foreign officials” to obtain or retain business. While payments to governmental officials may be commonplace in certain foreign countries, the common nature of such payments is no excuse in today’s vigilant environment. And, a lack of knowledge is not a defense under the FCPA. The SEC and Department of Justice have little tolerance for corporations that revert to the claims that “we didn’t know the rules” or “we didn’t know that an illegal payment had been made.” Just as a company performs extensive pre-deal due diligence to protect itself from financial risk, aggressive FCPA enforcement dictates the need for investigative due diligence as protection against criminal prosecution. The Investigative Process Classic investigative due diligence is a distinct discipline which should complement and run parallel to its counterpart, financial due diligence. The three elements in a typical investigative process are: * Data base research, both business and media; * Public records searches; and * On-the-ground contact with government, industry, and other confidential sources. An optional fourth element, a voluntary background questionnaire developed for all of the transaction’s participants, can be particularly insightful and generate cost-effective leads. The questionnaire should be developed to elicit information about potential problem relationships and request references, which should in turn be verified. U.S.-headquartered corporations have become spoiled by the ease at which detailed information is available online in the United States. In sharp contrast, the retrieval of such data overseas for use in the investigative process is difficult at best. Many countries do not have legislation permitting access to government records. Also, overseas press and media organizations frequently lag behind their U.S. counterparts in placing their content online, and few public agencies maintain online data bases. This makes it all the more important to rely on on-the-ground-support to scour alternative sources. Professionals specializing in FCPA due diligence can cultivate local channels of information, including government and law enforcement personnel, banks, and industry experts. Investigative Due Diligence Checklist When engaging in an international merger, acquisition, or joint venture: * Consider engaging an objective source to conduct investigative due diligence to run parallel to other deal due diligence; * Document all FCPA due diligence efforts thoroughly; * Determine whether participants in the potential transaction are “foreign officials,” members of a foreign political party, or candidates for office, as defined by the FCPA; * Conduct a thorough background check of key participants in the deal, including their reputations within the financial, legal, and government communities; * Review all available media regarding the participants, as well as public records; * Consult local country sources, including government and law enforcement personnel, banks, accounting and law firms, industry experts, competitors, customers, and suppliers; * Make inquiries with U.S. government sources, including the Departments of State and Commerce and the U.S. Embassy; * Conduct a complete study of the potential target’s or joint venture partner’s executive and management structure, including the identities and relationships to government, candidates for office, and political parties of all stockholders, partners, directors, officers, and other members of the management of the firm; and * Review the target company’s FCPA compliance program and conduct a compliance audit. Look for Specific Red Flags In addition to the above checklist that a company should follow as a matter of course, there are certain red-flag situations that can be important signs that a relationship with the acquisition target or potential joint venture partner may expose the company to FCPA liability. Red flags may appear in many forms, including unusual payment patterns, proposed contract terms, or billing requests. Extra precautions should be taken where circumstances reveal the following by principals in the acquisition target or potential joint venture partner (the “venture principal”): * Off-the-books accounts where payment is made to a venture principal who then diverts part of the proceeds to a separate account for unexplained reasons. * The venture principal makes unusual requests, such as backdating or altering invoices or asking for payment by unusual means, such as through bank accounts outside of the country in which the services are being offered or through payment to third persons. * The venture principal requests over-invoicing, requests checks be made out to “bearer” or “cash,” or seeks payment by some other anonymous means. * The payment is being made in a country with a widespread history of corruption. Some of the markets that offer the most potential growth for U.S. firms are also those that portend the greatest FCPA exposure; former communist countries are highly susceptible to bribery and kickbacks as they make their transition to the free-enterprise system. * The venture principal wants to work without a contract (or with a vague contract) and refuses to confirm that it will abide by the provisions of the FCPA. * The venture principal asks for commissions that are substantially higher than the “going rate” in that country among comparable service providers (especially where the amount or nature of work does not justify the large payments). * The venture principal requests an unusually large credit line for a new customer, unusually large bonuses or similar payments, or substantial and unorthodox up-front payments. * A venture principal has family or business ties with government officials, or has a bad reputation in the business community. * A potential government customer or authorizing agency recommends a venture principal. In these cases, the reasons for recommendation should be carefully evaluated. * A venture principal’s business appears to lack sufficient staff (or staff qualifications) to perform the services offered, is new to the business, or cannot provide references to document its claimed experience. * Information is kept to a small number of officers within the corporation, or shell companies are created to receive revenues and facilitate transactions. True Stories Investigation of FCPA violations has substantially increased as U.S. companies step up the pace of global expansion. As of 1995, only 16 FCPA bribery prosecutions had been brought over the course of 18 years. Today, Department of Justice sources indicate that there are at least 75 cases under current investigation. And there is blood in the water; a Fortune 1,000 executive is currently serving a prison sentence in connection with FCPA violations. In one recent proposed joint venture, a major U.S. aerospace company was seeking to enter into a relationship with a construction firm in a South American country. During the course of investigative due diligence, the fact surfaced that the potential joint venture partner routinely made payments to government officials to facilitate the award of government contracts and was implicated in several bribery scandals. As a result, the company decided not to proceed with the joint venture, thereby protecting itself from potential criminal prosecution. In another instance, investigative due diligence for several recent international deals identified potential consultants or “facilitators” for major oil companies seeking to do oil and gas exploration or operate privatized electric utilities in foreign countries. The due diligence uncovered that the potential “consultants” were actually government officials, who in fact did not even provide any legitimate consulting services. As a result, these transactions were not consummated, once again protecting the potential acquirer from violating the FCPA. Vigilance Should Never Stop A corporation’s obligation does not end with the successful culmination of a deal. Compliance with the FCPA, and monitoring of such compliance, must be ongoing because the penalties for infractions are steep. People convicted of FCPA violations face up to five years of imprisonment. To the Securities and Exchange Commission and Department of Justice, the FCPA is a law worth enforcing. An effective investigative due diligence program is the most effective way to minimize these risks. Sins of the TargetLame excuses won’t wash with U.S. regulatorsdead set on preventing American companies fromgetting enmeshed in bribery of overseasgovernment officials. That puts extra pressure onAmericans acquiring overseas who can get stungby hefty fines under the Foreign Corrupt Practices Act if their foreign subs regularly greasepalms to win business or concessions fromgovernments. The problem is that official briberyis rife in many foreign countries, including areasthat appeal to U.S. buyers or offer a supply ofattractive target companies. Self-protection adds out-of-the-box detectivework to standard due diligence. Finding – andstopping – bribery requires buyers to go down some unusual routes, including checking outfamily and friends, auditing billing and payment records for strange patterns, and looking out forother red flags that signal infractions.