Practice Note: How to handle real estate compliance risks
Thursday, August 25, 2016 at 8:22AM
Kim Nemirow and Amanda Raad in China, Due Diligence, Real Estate, gift cards

In the prior post, we talked about anti-corruption enforcement actions and investigations involving real estate. Now let's look at real estate-related compliance.

A strong compliance program can help an investor detect and avoid a high-risk transaction, or at a minimum ensure that the investor avoids liability for conduct of a rogue third party.

Two examples we’ve seen in practice are described below: 

Compliance programs are not one-size fits all and should be tailored to a company’s operations and risk areas.

With that caveat, what follows are guideposts for an effective compliance program in the real estate industry:

Enterprise-Level Compliance Program: A real estate investor’s compliance program should begin with appropriate policies and procedures for its own business and employees. Investment professionals should be trained on the risks of doing business internationally and, importantly, anyone serving as a board director should understand their heightened obligations and potential individual liability for conduct at the investment.

Pre-Acquisition Due Diligence - Assets: Prior to acquiring an asset or making an investment, diligence should be conducted on the seller and asset to determine whether there are any past issues with the property or corrupt conduct on behalf of the seller. For established, fully operational properties, this might include looking at prior investors and property managers to determine if they have been involved in any criminal conduct that might raise red flags, or how prior contracts or licenses with government officials were negotiated or renewed.

In the case of developing properties, or the purchase of land to build a property, the investor will need to understand what permits and licenses will be required to construct the property and how those will be obtained (including whether they will be obtained prior to or as a condition to the closing of the acquisition).  In all cases, investors will want to pay particular attention to any red flags indicating that the seller may not have proper and clear title to the property.

Pre-Acquisition Due Diligence – Property Managers: A company’s compliance program should set out risk-based due diligence steps to be taken when engaging property managers or partnering with local sponsors or operators through joint venture agreements. Heightened due diligence will often be required for these parties, particularly in high risk countries, given that they may be interacting with government officials to obtain approvals, permits and licenses, and will also be working with prospective business partners to lease the property and provide management oversight.

For both assets and property managers, the due diligence steps to be conducted will largely depend on the risk presented, but may include, a public media search on the relevant parties and key individuals, including checking individuals and entities against sanctioned party lists, review of relevant documents, policies and procedures, and a discussion with management or completion of a due diligence questionnaire. Appropriate representations, warranties and covenants in contractual agreements should also be considered.

Portfolio Risk Assessment: In order to have an efficient and effective compliance program, it is imperative that real estate investors and developers understand their risks. Conducting a risk assessment across all properties and property managers in an investor’s portfolio will allow the investor to tailor its compliance program and effectively allocate resources. The risk assessment should include an analysis of the location of the assets, the extensiveness of government contacts, the use of third parties, and any existing compliance program in place.

Monitoring Assets and Third Party Property Managers: Just as companies must monitor compliance at an enterprise level, they should also monitor compliance at the asset and property manager level. Depending on ownership stake and risk level, the type of monitoring will vary, but might include conducting periodic audits and obtaining compliance certifications.

In addition to proactive monitoring, owners, developers, and investors should take appropriate steps to investigate any red flags that might arise in relation to the property, including via an allegation or other complaint. We have seen whistleblowers report concerns about a property or property manager directly to the investor, and it is imperative that the investor take appropriate steps to investigate all reasonably credible allegations.

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There is no doubt these risks are real, and regulators are paying close attention. While no compliance solution is failsafe, your best protection is to closely examine your unique risk profile and to create a tailored compliance program.

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Kim Nemirow and Amanda Raad are partners in Ropes & Gray’s government enforcement practice, based in Chicago and London respectively.  
 
The authors thank
Sean Seelinger and Alicia Suarez, associates in Ropes & Gray’s government enforcement practice, based in London and Chicago respectively, for their assistance with this post.

Article originally appeared on The FCPA Blog (http://www.fcpablog.com/).
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