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Compliance: FCPA diligence in M&A transactions

Some due diligence considerations and things to consider with your target's independent contractors

Inside counsel would be wise to consider the significant recent increase in enforcement of the Foreign Corrupt Practices Act (FCPA) of 1977, as amended when conducting due diligence in connection with an acquisition of a foreign target or a target with international operations, because the target’s conduct may be your company’s FCPA liability upon consummation of the acquisition, even if, in the case of a foreign target with no prior nexus to the United States, the target’s conduct is not in violation of the FCPA prior to the acquisition.

The FCPA prohibits U.S. citizens and U.S. companies, and their officers, directors and employees, from offering, promising, making or authorizing corrupt payments or gifts of anything of value to foreign officials for the purpose of influencing a foreign official’s decision, inducing a foreign official to violate his or her duty or gaining an unfair business advantage. Foreign citizens and foreign companies undertaking any part of such activities in U.S. territory or in interstate commerce are also subject to the law. The FCPA also mandates certain financial controls and financial reporting requirements on U.S. public companies. The law is interpreted broadly. A gift or payment can be cash, an expensive holiday gift, a donation to the official’s favorite charity or, possibly, a job for a foreign official’s child. A foreign official can be any employee or officer of any foreign government or any department, instrumentality or agency of a foreign government, including an officer or employee of a state-owned or state-controlled company, or a candidate for foreign political office.

Due diligence considerations

Early-stage FCPA due diligence should begin with background checks on the target and the target’s countries of operation and interviews with key personnel and agents. Based on this, inside counsel can determine the level of due diligence required. Here are some things to consider:

  • How corrupt are the countries where the target operates?
  • How extensive and important are contacts with foreign officials and what are the reputations of the foreign officials affecting the target’s business?  For example, does the target sell products or services to a state-owned enterprise? Does it partner with a national resource company? Does it seek financing from a sovereign wealth fund? Does its success depend on authorizations, waivers, permits or licenses from a government department? Did it do so in the not-so-distant past?
  • Consider the target’s reputation and track record regarding corruption. Is it generally in compliance with the laws regulating its business?
  • Does the target have an anti-corruption compliance program and how seriously is it taken by senior management? Is training a key component? Does it vet its employees? What is the reporting process?
  • Are credible and reliable financial and accounting controls in place to detect FCPA issues? Consider accounting due diligence to check high-risk or suspicious payments.

Target’s independent contractors

Many high profile FCPA enforcement actions have involved payments to foreign officials made through joint venture partners or independent contractors, such as contractors, consultants or agents. Not having actual knowledge that amounts paid to independent contractors were used, in whole or in part, to make corrupt payments to foreign officials will not shield your company from an FCPA violation if the company has consciously avoided knowing that some portion of those payments found their way to foreign officials. Your target’s independent contractors may be your sales agents and consultants when the acquisition is consummated, so here are the types of things to consider:

  • Does the target use independent agents, sales agents, distributors, resellers or consultants in its business and what contact do they have with foreign officials?
  • Does the target check its independent contractors as carefully as your company checks its independent contractors in similar situations? For example, has the target investigated the reputation and track record of the independent contractor? Has the target determined whether the owners, officers, stockholders, members or partners of the independent contractor are foreign officials or related to foreign officials? Has the target enquired about the independent contractor’s compliance program and is it as robust as your program for the same set of circumstances?
  • With respect to the contracts with independent contractors that deal with foreign officials, is the scope of work in line with the needs of the business and are the payments commensurate with the services provided? Does the target have audit rights to check on suspicious activity and termination rights to cancel the contract when the risk profile exceeds reasonable levels? Do the contracts have anti-bribery representations, warranties, covenants and indemnification provisions?

The extent of due diligence in connection with an acquisition may depend on a number of factors, such as the time available until closing, the purchase price and the extent to which law and custom allow pre-acquisition due diligence. However, having due diligence focused on FCPA compliance as part of your company’s due diligence process early in the acquisition process adds value. It affects whether or not the deal goes forward, and if so, the structure of the deal, the purchase price and the payment terms and timing and conditions for payment. Furthermore, it affects the representations, warranties and covenants, and termination and indemnification provisions, of the acquisition agreement. Early warning of real problems, or signs of risks due to lack of transparency, that arise from pre-acquisition due diligence can be addressed in ways not available to an acquirer after closing. For instance, an acquirer can avail itself of the U.S. Department of Justice’s Opinion Procedure to understand how to address potential risks, and existing violations, depending on the circumstances, may receive a more receptive audience, as in the case of the Department of Justice’s settlement with Armor Holdings, Inc.

Contributing Author

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Robert J. Gavigan

Robert J. Gavigan is a partner in the Corporate group of Cohen & Gresser LLP.

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Contributing Author

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Andrew M. Por

Andrew M. Por is an associate in the Corporate group of Cohen & Gresser LLP.

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