United States: FCPA Diligence In Infrastructure Transactions

Companies that make, authorize, or even promise bribes to foreign officials face the risk of criminal prosecution under U.S. law. The United States Foreign Corrupt Practices Act of 19771 (FCPA) makes it illegal for issuers2, domestic concerns3 and, under certain circumstances, foreign persons, to bribe foreign officials4 in order to obtain or retain business. The FCPA also covers the officers, directors, employees and agents of such companies. Companies that acquire businesses that have engaged in bribery can acquire significant liability.

FCPA compliance presents special challenges for U.S. companies and investors engaged in infrastructure and energy transactions worldwide. Infrastructure and energy projects are particularly susceptible to FCPA violations. Companies can reduce this risk by performing in-depth FCPA diligence when acquiring an at-risk target.

This Stroock Special Bulletin highlights some of the procedures that should be employed when conducting FCPA diligence in infrastructure or energy transactions outside of the U.S.

FCPA Enforcement

Enforcement of the FCPA falls within the jurisdiction of the U.S. Department of Justice ("DOJ") and the Securities and Exchange Commission (the "SEC"). Beginning in 2005, FCPA enforcement increased substantially with a string of high profile (and costly) investigations and settlements having taken place over the past few years. FCPA investigations and convictions can result not only in huge investigation and settlement costs, but can force companies to submit to a regulatory monitor, and defend themselves in suspension and debarment proceedings, both as exporters and as government contractors. In addition, companies can suffer enormous reputational costs and market losses.5

Although U.S. companies and individuals are the most likely targets for FCPA scrutiny by DOJ and the SEC, foreign companies that are issuers, that do business in the U.S., or that otherwise conduct business with U.S. companies, can also face exposure under the law. Both DOJ and the SEC have taken the position that foreign companies or their representatives can subject themselves to U.S. jurisdiction under the FCPA if, for example, they conspire with U.S. companies or individuals to obtain business overseas by paying bribes – even if the foreign national in question never set foot in the United States. Foreign investors also can run afoul of the FCPA if they, or their agents, cause some act in furtherance of a bribe that has a connection to the U.S.6 In addition, private investment funds that seek capital from foreign government entities, such as sovereign wealth funds or government-controlled pension plans, can also be at risk for FCPA liability.

Although any U.S. business (and, as noted, sometimes even a foreign business or investor) which interacts directly or indirectly with foreign governmental entities and their officers and employees can be the subject of an FCPA violation, certain industries are more at risk. Infrastructure and energy projects are particularly susceptible to FCPA violations due to the highly regulated nature of the projects, the high risk of bribery and corruption in many of the countries in which these projects are undertaken, the common utilization of third-party agents or consultants to handle related transactions in-country, and the numerous government concessions and approvals that are often part of such projects. Companies can take steps to reduce their potential exposure to FCPA risk by implementing measures that include creating a culture of compliance starting at the top, implementing robust training, maintaining vigorous compliance programs and internal controls, performing targeted due diligence when acquiring an at-risk target or when entering into business with an at-risk agent, and writing FCPA-compliance requirements into contracts.

Red Flags

When conducting FCPA due diligence for M&A deals we typically employ the following process. In the initial stages, we focus on identifying any potential bribery/corruption risks ("red flags") that are presented by a proposed acquisition or merger. These red flags may occur across a broad spectrum of risk, and could include a combination of country risk (such as China, India or Mexico, where bribery is considered in many business sectors as "a way of doing business"), industry risk (such as infrastructure and natural resources), business partnership risk (such as third party sales representatives) or specific transaction risk. In looking for red flags, our typical areas of focus include, among others:

  • High risk markets and third party relationships;
  • Government contracts or highly regulated businesses;
  • Expenses (e.g., travel, hospitality, entertainment, gifts, donations);
  • Inventory management;
  • Sales and promotional activities;
  • Compensation arrangements;
  • Reports of non-compliance (e.g., hotline or media reports);
  • Pricing, payment and accounting practices; and
  • Control issues or weaknesses previously identified by internal/external audits.

Infrastructure projects are often government-sanctioned or involve highly regulated businesses, often with monopolies due to government-granted concessions or permits. Such concessions or permits can be the subject of potential bribery or unlawful payments due to the subjective award criteria often employed, as well as the ever present risk of a government revocation of the concession grant or permits. As a result, infrastructure projects can present significant FCPA risks in an acquisition/transaction setting.

Diligence Approach

We typically begin our diligence by reviewing all relevant documentation that is posted to the transaction data room (or that is otherwise made available), and submitting due diligence questions, with particular focus on the following items and tasks:

1 The Target's corporate compliance manual, ethics policy or corporate code of conduct, anti-corruption policies and procedures, and any other related documents.

2 The Target's ethics compliance program, including training. Identification of the personnel responsible for the program, including the chief compliance officer and the person to whom s/he reports, and those personnel who staff the other ethics functions.

  • Review copies of training programs, materials, metrics (attendance, testing scores, etc.) and employee certifications.
  • Review copies of any internal anti-corruption compliance audits, reviews or reports.

3 The Target's sales of products or services to foreign government, quasi-government, or state-owned buyers or customers, including the identification of the countries in which such sales occur, and whether the sales involved agents, brokers or other similar third-party representatives.

4 Sales agents, brokers, or other similar third party representatives retained by the Target in foreign countries for the previous five-year period.

  • Review copies of all agreements with such representatives and, where appropriate, conduct interviews of such individuals. Commission arrangements present inherent risk, and high commissions are a red flag.

5 For the previous five-year period (the statute of limitations period for an FCPA violation), inquiries, audits, investigations (whether internal or external), prosecutions of, indictments or charges against, or convictions of the Target (including any officer, director, employee, or representative) by any Governmental authority concerning potential violations of the FCPA, or any other applicable anti-corruption law.

6 The internal accounting controls the Target has in place to ensure that transactions and related expenses are properly executed and recorded, and any compliance audits respecting such internal controls, including policies and procedures for documenting and controlling disbursements for travel and entertainment expenses.

As part of the above inquiries, we usually seek to interview the chief compliance officer and, as necessary, other personnel from relevant departments such as Marketing, Legal, Finance/Accounting, Internal Audit, and HR.

In addition to the document review, we typically perform an internet search for news reports, if any, over the previous five years that would flag potential corruption risk. For example, we typically review any news reports of corruption involving the Target's customers, or that identify the Target's owners, senior managers, or agents as persons of interest in corruption investigations, or of illegal activity involving the Target or its senior managers or agents.

Based on the results of the initial stage of diligence, there may be areas that require additional inquiry in order to mitigate risk. For example, the initial diligence may reveal that a third-party sales representative has incurred substantial travel and entertainment costs in connection with a public contract tender, or that payments have been made in connection with permits, inspections or customs matters. Such circumstances would argue in favor of a more detailed review of those costs to ensure that there are no improprieties.

Depending on the circumstances, we generally work with local counsel in at-risk countries and, if necessary, rely on them to assist with FCPA diligence. In addition, if appropriate, we work with the accounting firm that is conducting financial diligence to assist in evaluating the accounting records. Among their tasks would be to conduct due diligence on internal controls, petty cash and disbursements.

Many countries have their own anti-corruption laws that also need to be complied with, including European nations such as the United Kingdom with its recently enacted Bribery Act, and the "BRIC" countries – Brazil, Russia, India, and China. Other countries, such as Mexico, have recently enacted anti-corruption legislation that also could carry additional risk. It is prudent to have local counsel review key concerns in a similar manner, and we work to ensure that such reviews are properly coordinated. It is important to note that bribery is illegal in virtually all nations, and that improper payments therefore may give rise to local prosecutions. Further, prohibitions against bribery may extend to commercial bribery as well as public corruption, as does, for example, the UK Bribery Act.

The above process enables us to conduct the appropriate level of diligence while controlling costs and levels of effort.

Recommendations

Any issues or concerns arising from our diligence review are reported to the client and the implications and liabilities discussed, including the risk of successor liability. Appropriate representations, indemnities and escrows would also be included within the M&A transaction documents.

Appropriate FCPA diligence is a cost-effective way of mitigating risk. The cost of performing an FCPA internal investigation or defending an FCPA enforcement action after an alleged violation can reach into the tens of millions of dollars, not including civil penalties or criminal fines.7

As noted above, under successor liability principles, an acquirer can be held liable for the FCPA violations committed by a target company – even if those violations took place prior to the acquirer obtaining control over the company. There is no grace period if there are ongoing violations. The expectation among government regulators at DOJ and the SEC is that companies will conduct adequate FCPA diligence as part of their overall acquisition/transaction due diligence.

Given the very real risks, the potentially enormous investigation and settlement costs, the risk of suspension and debarment proceedings, and the potentially devastating reputational costs and market losses, we strongly recommend that a potential acquirer conduct an appropriate level of FCPA diligence prior to acquiring a target. This is particularly important in the case of certain infrastructure projects, which present a high risk for improper payments and FCPA violations.

Originally published by Law360


Richard Madris, based in New York, is a partner and chairman of the infrastructure practice at Stroock, which represents clients engaged in infrastructure projects, public-private partnerships and development transactions in a range of sectors, including transportation, water, PPPs and economic development, stadiums and social infrastructure, utilities and transmission, power generation, renewable energy, industrial facilities, infrastructure funds, joint ventures and consortiums. Christopher Brewster and Gregory Jaeger are special counsel in Stroock's national security/CFIUS/compliance practice, which handles FCPA investigations, compliance and diligence reviews. They are both based in Washington, D.C.

Footnotes

1 Pub. L. No. 95-213 (codified as amended in 15 U.S.C. §78dd et seq.)

2 The term "issuers" means those issuing registered securities on U.S. stock exchanges or that are required to file reports under the U.S. Securities Exchange Act of 1934.

3 The term "domestic concern" means any (a) individual who is a citizen, national, or resident of the United States; and (b) any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship which has its principal place of business in the United States or which is organized under the laws of a State of the United States or a territory, possession, or commonwealth of the United States.

4 The definition of "foreign official" is broad and includes any person employed by a foreign government – not just senior officials. Further, the term reaches employees of many state owned or controlled businesses.

5 The FCPA not only prohibits bribery of foreign officials, but requires issuers to prepare and maintain books and records that "accurately and fairly reflect the transactions and dispositions of the assets of the issuer," and to develop and maintain an adequate system of accounting controls.

6 It should be noted that non-US persons who engage in corruption can also be subject to prosecution under U.S. laws other than the FCPA, such as conspiracy, money laundering and mail/wire fraud.

7 Recent enforcement actions have also included the criminal prosecution of senior managers who endorsed illegal activity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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