United States: DOJ And OFAC Actions Highlight Importance Of Compliance In International M&A

Summary and Action Alert

Recent actions taken by the Department of Justice ("DOJ") and the Department of Treasury's Office of Foreign Assets Control ("OFAC") have highlighted the importance of due diligence in the mergers and acquisitions context.

In February and March of 2019, OFAC published three separate notices of settlements related to persistent wrongful conduct of foreign subsidiaries of U.S. entities in violation of U.S. economic sanctions. OFAC is emphatically telegraphing its focus on pre-acquisition due diligence and aggressive post-acquisition implementation of global compliance programs by U.S. acquirers.

The DOJ has also recently put a spotlight on the importance of due diligence in the mergers and acquisitions context. On March 8, 2019, it announced revisions to its Foreign Corrupt Practices Act Corporate Enforcement Policy (the "DOJ Policy"), which was first released in 2017. These revisions encourage companies to conduct pre-acquisition due diligence and to promptly self-disclose any uncovered misconduct to the DOJ. Companies that comply with the revised policy will be eligible for a presumption of a declination in accordance with and subject to the other requirements in the DOJ Policy.

OFAC Enforcement Actions

1. Stanley Black & Decker: Post-Acquisition Training No Substitute for Audits and Monitoring

On March 27, 2019, OFAC announced a settlement with Stanley Black & Decker, Inc. and its Chinese subsidiary, Jiangsu Guoquiang Tools Co. Ltd. ("GQ Tools") under which Stanley Black & Decker agreed to pay over $1.8 million for sanctions violations committed by the foreign subsidiary in violation of Iran sanctions – in short, intentionally making or attempting to make 23 shipments of tools worth $3 million, either directly or indirectly to Iran.

OFAC's penalties were imposed in spite of multiple steps taken by Stanley Black & Decker to guard against sanctions violations by its new subsidiary prior to and following the acquisition of GQ Tools:

  • In pre-acquisition due diligence, Stanley Black & Decker undertook due diligence and learned that GQ Tools was exporting goods to Iran.
  • Stanley Black & Decker required GQ Tools to cease sales to Iran as a prerequisite to closing and provided a series of trainings to GQ employees on U.S. sanctions compliance.
  • Upon learning of the post-acquisition violations, Stanley Black & Decker halted all GQ Tools exports, voluntarily self-reported the violations, hired an independent investigator, conducted an internal investigation, and signed multiple tolling agreements to extend the statute of limitations during OFAC's investigation.

The U.S. parent company's failure to implement post-acquisition procedures to monitor or audit GQ Tools' operations to ensure no recurrence of Iran-related sales weighed against the compliance efforts that had been made; in addition, GQ Tools was a sophisticated company with a history of extensive export operations, and its management willfully violated the Iran sanctions. The settlement agreement explicitly highlighted "the importance for U.S. companies to conduct sanctions-related due diligence both prior and subsequent to mergers and acquisitions, and to take appropriate steps to audit, monitor, and verify newly acquired subsidiaries and affiliates for OFAC compliance."

2. Illinois Tool Works, Inc.: Extensive Misconduct by Foreign Subsidiary Continues Even After Voluntary Disclosure to OFAC

On February 14, 2019, OFAC published a settlement agreement assessing a civil monetary penalty of approximately $5.5 million against AppliChem GmbH, a foreign subsidiary of a U.S. company, Illinois Tool Works, Inc. ("ITK"), for violations of Cuban sanctions by AppliChem's Spanish branch, occurring over the course of four years after AppliChem's acquisition by ITK. These violations occurred despite ITK's pre-acquisition due diligence and closing requirements that AppliChem cease the Cuba business. Even after ITK discovered some violations (shipments of chemical reagents to Cuba) and voluntarily disclosed them to OFAC, the illegal shipments continued for two more years with the complicity of AppliChem's Spanish management.

In making the decision to fine AppliChem despite ITK's efforts, OFAC cited:

  • The willful conduct of AppliChem's management.
  • The size and sophistication of AppliChem.
  • The size and international sophistication of ITK.
  • ITK's failure to initiate a full internal investigation after AppliChem employees reported indications of continued sales to Cuba.

3. Kollmorgen Corporation: Foreign Affiliate Continues Iranian Sales Post-Acquisition Despite "Extensive Efforts" by U.S. Parent to Require Compliance

A settlement with Kollmorgen Corporation published on February 7, 2019 is even more sobering, despite the small dollar amount ($13,381). Kollmorgen is a U.S. company that had acquired Elsim Elektroteknik, a Turkish entity, and undertook "extensive efforts" (as OFAC recognized) to ensure that its new affiliate complied with U.S. sanctions laws. These were unsuccessful – post-acquisition, over the course of two years, Elsim knowingly continued to provide services in violation of the sanctions to machines in Iran, and to provide products, parts, or services valued at $14,867 to Iranian end-users. Despite the low dollar value of these services, the potential initial fine was $750,000 – however, due to Kollmorgen's extensive post-acquisition compliance efforts, and its voluntary self-reporting of misconduct and remedial actions, this penalty was reduced to $13,381. This amount, of course, does not include the assuredly heavy legal and investigative fees that were paid by Kollmorgen to achieve that result.

DOJ Policy Revisions

The DOJ Policy revision follows a series of public guidance provided by the DOJ on the importance of FCPA due diligence in the M&A context. In 2012, the DOJ and the SEC issued a "Resource Guide" to the FCPA, which used real-world examples and hypotheticals to provide concrete direction about key FCPA issues. This guide includes a section on M&A due diligence, which includes practical tips to reduce FCPA risk such as conducting thorough risk-based FCPA and anti-corruption due diligence on potential business acquisitions, and conducting trainings for directors, officers, and employees of newly acquired businesses, among others.

As one real-world example, in 2008, the DOJ issued an opinion at the request of Halliburton regarding a potential acquisition of a U.K.-based company. Based on the nature of the U.K. bidding process, Halliburton would not have been able to engage in adequate FCPA due diligence prior to the acquisition. As a result, Halliburton submitted a request for an opinion from the DOJ regarding its liability after closing for any of the target company's pre-acquisition conduct that violated the FCPA, in which it pre-emptively proposed to undertake a demanding post-acquisition plan. The DOJ agreed not to take any enforcement actions against Halliburton for any pre-or post-acquisition conduct by the target company, but in exchange required Halliburton to agree to a rigorous post-acquisition due diligence and remediation plan. Then, in 2016, the DOJ initiated a program under which it announced a handful of scenarios in which a company may receive a declination, including voluntary disclosures of misconduct and otherwise cooperating with investigations.

In 2017, the DOJ released an updated policy to further incentivize voluntary self-disclosure and cooperation with investigations. Under this policy revision, the DOJ offered an express presumption of declination to prosecute companies that voluntarily disclosed misconduct, cooperated with investigations, and appropriately remediated the situation and made restitutions or otherwise disgorged all illicit profits. The latest policy revision clarifies that acquiring companies can rely on a presumption of a declination if they act in accordance with the DOJ Policy both pre-and post-acquisition. This would include conducting appropriate due diligence and promptly self-disclosing any uncovered misconduct to the DOJ and otherwise complying with the DOJ Policy on cooperation and remediation.

Key Takeaways

  • OFAC could not be more explicit in its messaging regarding the importance of not just pre-acquisition due diligence, but post-acquisition training, monitoring and auditing for violations, and voluntary self-disclosures. Finding resources to fully implement the necessary compliance and monitoring systems right upon closing is vital.
  • Penalties are likely to be reduced for good responses to violations and cooperation with investigations by OFAC, but this will not lessen the pain and cost of the investigation and legal advice required to respond to these events. Repeat offenders will not be given multiple tries to "get compliance right."
  • U.S. acquirers should engage in extensive due diligence when acquiring foreign entities, in particular those suspected to have relationships with sanctioned entities or with FCPA risk. In addition, the U.S. parent must remain vigilant post-acquisition, and should proactively take necessary precautions including internal audits to keep apprised of violations. Upon learning of any violations, companies should undertake mitigating steps including voluntary self-disclosure, cooperation with investigations, and timely remediation in order to maximize the possibility of penalty mitigation or declination.

Resources

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions