The Foreign Corrupt Practices Act (“FCPA”) prohibits U.S. companies and citizens, foreign companies listed on a U.S. stock exchange, or any person acting while in the United States, from corruptly paying or offering to pay, directly or indirectly, money or anything of value to a foreign official to obtain or retain business. The FCPA is jointly enforced by the Department of Justice (“DOJ”) and the Securities Exchange Commission (“SEC”). As I recently wrote, both agencies are enforcing the statute much more stringently than in the past, including through litigation strategies based on strict liability as a standard by which corporate officers can be judged for overseeing bribery schemes. The DOJ has collected a record $450 million and $400 million fines against two companies, and record numbers of individuals have been indicted on corruption-related charges since 2009, a number that skyrocketed in 2010.
HOW THE FCPA RELATES TO MERGERS & ACQUISITIONS
The DOJ’s and SEC’s more stringent enforcement of the FCPA has important implications for mergers and acquisitions. According to Rebekah Poston, an expert anti-corruption practitioner at the international law firm Squire Sanders & Dempsey, American companies who neglect to conduct thorough due diligence when acquiring foreign companies risk inheriting or creating FCPA violations. See Rebekah A. Poston, David A. Saltzman & Gregory W. Bates, FCPA Due Diligence in Acquisitions, 43 The Review of Securities and Commodities Regulation 13 (Jan. 20, 2010). Acquiring a foreign company requires the performance of a number of affirmative duties on the part of the acquirer. These include, but are not limited to:
- Determining whether “private” entities may in fact be state-owned to an extent that could trigger FCPA liability for improper action (or inaction).
- Using highly vetted consultants who are trained in FCPA compliance to deal with foreign officials. Neither the importance of such consultants nor the necessary amount of prior due diligence to vet them can be overstated.
- Using carefully drafted contracts that protect your company from FCPA liability. Few contracts will ever be FCPA-proof, but Poston, Saltzman, and Bates offer invaluable suggestions, which are discussed below.
- Maintaining detailed documentary evidence of your due diligence. This is critical if your company is investigated by U.S. officials.
- Addressing FCPA accounting concerns by instituting carefully tailored internal controls.
PRIVATE INDUSTRY IN FOREIGN JURISDICTIONS
When dealing with members of private industry abroad, it is important to remember that they may be considered government officials under the FCPA if the company in question is a state-owned entity. Consider, for example, whether the foreign national government owns a materially sufficient percentage of the company such that it should be considered a government instrumentality. Can the government appoint corporate directors? Do the company’s employees also hold government roles or have the rights and privileges of government positions by means of connections or prior posts? Finally, has the company accepted capital from state-owned investment funds managed by government officials? These are all questions that must be answered.
THE USE OF THIRD-PARTY CONSULTANTS
American companies doing business abroad regularly use consultants to help them navigate local laws, customs, and industries; to secure licenses; and to lend credibility as they deal with foreign officials and regulators. While this is par for the course, it also important to sound a cautionary note. Poston emphasizes:
Retaining the right consultant can be the difference between success and failure. But retaining the wrong consultant can be worse than hiring no consultant at all.
Id. at 17. The fact that U.S. principals can be held liable for violations of the FCPA as a result of either the commission or omission of their hired consultants makes it imperative both that they be carefully vetted initially and that their activity be monitored regularly.
Poston et al. further note that conducting due diligence on private parties requires myriad difficult questions “designed to elicit information about the consultant’s understanding of, and compliance with, the FCPA and anti-bribery laws of the consultant’s own country.” If a consultant doesn’t know the latter, don’t expect it to know the former. Third parties are not required to answer these questions. Nor, however, are you required to award them a contract.
All questions and the answers thereto should be in written form, including interviews conducted in person with the consultant’s management and personnel. Has the firm or its employees ever been convicted of bribery? Independent of your potential contract, does the consultant have its own corporate code of conduct to address anti-corruption? If so, what internal controls are in place? Do public records reveal relevant information—convictions and scandals, for instance—for which your questions may not have probed? Do public records reveal inconsistencies with the consultant’s written responses? These questions are by no means exhaustive and will depend on the jurisdiction, industry, and proposed merger or acquisition, among other factors. Almost as important as the answers (at times) will be the ability to demonstrate that your company asked them. Writes Poston:
If an investigation by the DOJ or SEC were to occur, it would benefit [your company] to be able to demonstrate that it was very meticulous in its due diligence and that it made a serious effort to confirm that the consultant was law-abiding before it was retained.
Id. at 19.
PROTECTING YOURSELF CONTRACTUALLY WITH CONSULTANTS
Assume that thorough due diligence leads to the conclusion that your chosen consultants should not be a liability from the perspective of the FCPA. The ability to assure to the greatest extent possible your company’s protection from potential liability lies in your contract with the consultant. According to Poston, your contractual negotiations should be guided by the following priorities.
Obtain representations and warranties from the consultant affirming its (i) awareness of the FCPA, including the exact language of key provisions and statutory definitions that you incorporate therein; (ii) awareness of its own country’s anti-bribery laws with the same level of exactness; (iii) past and present compliance with the FCPA; and (iv) all-important certification that the consulting firm is not a government-owned entity and that neither management nor employees are government officials. In this respect, your contract should also require the consultant to execute and deliver regular certification stating that it has not made or authorized any unlawful payments to induce a foreign official to act or not to act in any way on behalf of the company that violates the FCPA.
- Agree upon the consultant’s affirmative obligations in the event that either you or it discovers an FCPA violation.
- Establish your right both to withhold payment and to terminate the contract in the event of an FCPA violation by the consultant.
- Require the consultant to indemnify you in the event that it violates the FCPA.
- Ensure that your company at all times will have the right to audit the consultant’s books as they pertain to your business in the country. Everything should be scrutinized in order to comply with the FCPA’s accounting provisions, which require companies to maintain books and records that reasonably reflect the transactions of the corporation. Moreover, the FCPA requires that you ensure the presence of internal controls to maintain accountability for financial transactions with such a “degree of assurance as would satisfy the conduct of [your] own affairs.”
- Assume some of the critical burden of ensuring the consultant’s FCPA compliance by agreeing that you will send in your own FCPA experts to train their teams on these issues both before work begins and during the term of the contract.
THE ALARM BELLS RINGING IN YOUR COLLECTIVE CORPORATE CONSCIENCE
Poston offers important words of caution. Do not do business with consultants who will not enter into contracts with provisions such as the ones described above. These standards are exacting for good reason and any unwillingness to accept your terms is a bright red flag that your potential partner may not be able or willing to comply with the FCPA. She writes: Listen to the “alarm bells ringing in [your company’s] collective conscience.” Simple, sound advice.
Moreover, red flags are precisely that, and turning a blind eye to them is extremely dangerous, Companies and individual executives are not just on the hook as a result of negligence. Rather, courts are taking firm stances where partners have intentionally avoided acquiring knowledge once FCPA concerns have been exposed in order to deny knowledge thereof.
Stricter government enforcement of the FCPA is a fact of life. So too are mergers and acquisitions and their importance to business strategy. The two are intertwined in a manner that requires careful pre- and post-merger considerations by acquirers, most prudently with the advice of expert counsel.