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Entries in Due Diligence (138)

Monday
Jul132009

Knowing What You Don't Know

Prosecutors told the jury during Frederic Bourke's trial that instead of doing adequate due diligence for his investment in Viktor Kozeny's Azerbaijan privatization scheme, he'd "stuck his head in the sand." It may not sound like legal jargon but the "head-in-the-sand" phrase pops up often in criminal law and appears prominently in the Foreign Corrupt Practices Act's legislative history.

The Congressional Research Service said this in its report to Congress about enactment of the FCPA and its 1988 and 1998 amendments:

The "knowing" requirement . . . is intended to encompass the "conscious disregard" and "willful blindness" standards, including a conscious purpose to avoid learning the truth. The Conferees agreed that "simple negligence" or "mere foolishness" should not be the basis for liability.
However, the Conferees also agreed that the so-called "head-in-the-sand" problem-- variously described in the pertinent authorities as "conscious disregard," "willful blindness" or "deliberate ignorance"--should be covered so that management officials could not take refuge from the Act's prohibitions by their unwarranted obliviousness to any action (or inaction), language or other "signaling device" that should reasonably alert them of the "high probability" of an FCPA violation. *
Bourke, let's remember, was tried and convicted not under the FCPA itself but the general conspiracy statute (18 U.S.C. § 371—Conspiracy to Defraud the United States).** But he conspired to violate the FCPA's antibribery provisions, where offenses have to be "knowing," so any prosecution for an FCPA conspiracy would have to meet the same requirement.***

We haven't seen the instructions the judge issued to the jury about the law in Bourke's case. Most federal jury instructions, however, cover two kinds of "knowing:" what the defendant actually knows and what he or she should know under the circumstances. A typical jury instruction about the second kind of "knowing" would look like this:

In deciding whether [defendant] acted knowingly, you may infer that [defendant] had knowledge of a fact if you find that he/she deliberately closed his/her eyes to a fact that otherwise would have been obvious to him/her. In order to infer knowledge, you must find that two things have been established.

First, that [defendant] was aware of a high probability of [the fact in question].

Second, that [defendant] consciously and deliberately avoided learning of that fact. That is to say, [defendant] willfully made himself/herself blind to that fact.

It is entirely up to you to determine whether he/she deliberately closed his/her eyes to the fact and, if so, what inference, if any, should be drawn. However, it is important to bear in mind that mere negligence or mistake in failing to learn the fact is not sufficient. There must be a deliberate effort to remain ignorant of the fact.

From the Pattern Criminal Jury Instructions for the First Circuit at §2.14 (here). ****

Bourke didn't testify at his trial but he had always said he didn't know about Kozeny's bribes. That might have been true. But it didn't protect him because prosecutors could prove beyond a reasonable doubt that if he didn't know, it was because he didn't want to. So, legally speaking, he did know.

Head-in-the-sand accusations under the FCPA have long concerned managers, executives and board members. For them the verdict on Bourke brings a special warning. How much due diligence is enough? Relationships with overseas partners and agents are always troubling. Where's the line between adequate inquiry and conscious disregard or willful blindness? There's no easy answer. We say: More red flags, more due diligence. But how much more is always someone's judgment call -- and it had better be right.

Read all our posts about U.S. v. Kozeny and the prosecution of Frederic Bourke here.


________________

* The complete version of House Conference Report No. 100-576 for the 1988 Amendments included this unusually rich passage about "knowing:"

The "head-in-the-sand" problem is not unique to [the FCPA] and occurs in a variety of contexts, perhaps the most common being the situation where a person acquires property under "suspicious" circumstances and is charged with "knowledge" that it is stolen. Courts and commentators have considered such behavior to be "distinct from, but equally culpable as actual knowledge." See G. Williams, Criminal Law: The General Part, sec. 57 at 157 (2d ed. 1961). (emphasis added) Federal case law has discussed the carefully-drawn elements that comprise the "head-in-the-sand" state of mind in other contexts.

The Conferees agree with the reasoning found in such decisions as United States v. Jewel, 532 F.2d 679 (9th Cir. 1976); United States v. Bright, 517 F.2d 584 (2d Cir. 1975); United States v. Jacobs, 470 F.2d 270, 287 n.37 (2d Cir.), cert. denied sub nom. Lavelle v. United States, 414 U.S. 821 (1973). See also H. Rept. No. 96-1396, 96th Cong., 1st Sess. 35 (1980). The knowledge requirement is not equivalent to "recklessness." It requires an awareness of a high probability of the existence of the circumstance.

** 18 U.S.C. § 371. Conspiracy to commit offense or to defraud United States

If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both. . .

*** The anti-bribery provisions contain the following definition of "knowing" at §78dd-2 and §78dd-3:

(A) A person’s state of mind is “knowing” with respect to conduct, a circumstance, or a result if--

(i) such person is aware that such person is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or

(ii) such person has a firm belief that such circumstance exists or that such result is substantially certain to occur.

(B) When knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.

**** The Seventh Circuit's suggested instruction, as another example, similarly says:

4.06 “Knowingly” - Definition

When the word “knowingly” [the phrase “the defendant knew”] is used in these instructions, it means that the defendant realized what he was doing and was aware of the nature of his conduct, and did not act through ignorance, mistake or accident. [Knowledge may be proved by the defendant's conduct, and by all the facts and circumstances surrounding the case.] [You may infer knowledge from a combination of suspicion and indifference to the truth. If you find that a person had a strong suspicion that things were not what they seemed or that someone had withheld some important facts, yet shut his eyes for fear of what he would learn, you may conclude that he acted knowingly, as I have used that word. {You may not conclude that the defendant had knowledge if he was merely negligent in not discovering the truth.}]
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Tuesday
Jun162009

All Good For Sun?

In May, a month after it agreed to be acquired by Oracle for $7.4 billion, Sun Microsystems said it may have violated the Foreign Corrupt Practices Act and that the violations could have a material effect on its business. It launched an internal investigation and shared the results with the Justice Department and the Securities and Exchange Commission. See our post here.

Now it looks like it was all a false alarm. Sun's latest SEC filing, a Definitive Merger Proxy dated June 8, 2009 (Schedule 14A), says this:

Section 4.13. Compliance with Applicable Law.

(a) The Company and each of its Subsidiaries is and, since June 30, 2006 has been, in compliance in all material respects with all Applicable Laws and Orders. Neither the Company nor any of its Subsidiaries has received any written notice since June 30, 2006 (i) of any administrative, civil or criminal investigation or audit by any Governmental Authority relating to the Company or any of its Subsidiaries or (ii) from any Governmental Authority alleging that the Company or any of its Subsidiaries are not in compliance with any Applicable Law or Order in any material respect.

And a little later in the merger document, Sun represents to Oracle that without exception it has "complied with the U.S. Foreign Corrupt Practices Act of 1977 and other applicable anti-corruption laws." (see Section 4.24)

So, no FCPA violations and no notice from the DOJ or SEC of any investigations. A clean slate.

Not many internal FCPA investigations end this way. More often -- usually, in fact -- they start because of apparently reliable signs of compliance trouble. Most investigations then end up confirming that yes, violations occurred -- usually beyond the scope of initial concerns. Sun's outcome, therefore, isn't typical.

What happened here? Sun isn't saying. But the timing may not have been accidental. Did anonymous whistleblowers opposed to Oracle's acquisition file false complaints? It's happened before. Did people upset about potential disturbances in Sun's pivotal and hallowed role in the open-source community try to torpedo the deal by tossing false allegations into the mix? Twisted, but possible.

Wherever the allegations came from, Sun made all the right moves. It responded fast with a proper internal investigation, self-reports to the feds, and full disclosure to the marketplace. After all that, it came up with nothing. Compliance program and corporate integrity intact. Great result. Time to move on.

Before we all scatter, though, one last question.

Could Sun's statements in its merger proxy be wrong? Just boilerplate reps saving the place in the text? Might Sun still have FCPA problems it isn't disclosing just yet? Not likely, considering the Lockheed Martin / Titan case.

Those companies planned to merge in 2003. During due diligence, Titan was found to have serious FCPA compliance issues. Before Lockheed Martin terminated the merger, Titan had already filed an 8-K disclosure document with the SEC that included a proxy form with the merger agreement attached to it. That merger agreement, like Sun's, contained an unqualified representation by Titan to Lockheed Martin affirming FCPA compliance. But the representation later proved to be untrue.

The SEC warned through a release that the 8-K was a "communication with shareholders" from Titan and that a reasonable investor could have relied on the untrue FCPA representation, resulting in liability for securities law violations. Presumably, that SEC release would have guided Sun's preparation and publication of its Definitive Merger Proxy, including the compliance reps quoted above.

See Securities Exchange Act of 1934 Release No. 51283 / March 1, 2005 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on potential Exchange Act Section 10(b) and Section 14(a) liability here.

Editor's Note: It's not all that clear whether Sun's reps are correct as written. Take a look at the AmLaw Daily's story suggesting Sun may have jumped the gun with its filing. We're waiting for clarification from Sun itself. And so, we imagine, are its shareholders.
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Monday
Jan052009

Dealing With Danger

Compliance-savvy executives worry about the risks that come from third parties -- overseas acquisition targets, joint venture partners, distributors and agents. About three quarters of the bosses, according to KPMG's 2008 Anti-Bribery and Anti-Corruption Survey, think their company's handling of intermediaries isn't working. They cite difficulties performing effective due diligence and their inability to adequately audit third parties for compliance.

The executives are right to be concerned. The Foreign Corrupt Practices Act says you can't hire an agent to pay bribes for you. You can't use joint venture partners for the dirty work either. You can't use a brother-in-law or charitable foundation or any other circuitous route. Bribes to foreign officials that originate from your hand are your responsibility, no matter how indirectly you try to pass them on. So when American companies go abroad, it's up to them to make sure all their business partners -- suppliers, subcontractors, professional advisors, agents and joint venture partners -- keep the business clean. Companies that don't try to stop intermediaries from paying bribes have no real defense under the FCPA when problems happen.

But how far must companies go to prevent their middlemen from paying bribes? That's always the question on everyone's mind. There's no bright line here, no blueprint from the DOJ or SEC, no safe harbor. And that's what worries the executives. They have to do business with and through intermediaries, but they also have to comply with the Foreign Corrupt Practices Act. Doing both sometimes seems impossible.

Take, for example, our reader who sent the comments below. He's a top compliance professional but he doesn't have all the answers and neither do we. But we appreciate his honesty and willingness to share his concerns and thoughts. He's fairly typical, we think, of those who want to comply with the FCPA but aren't always sure how to do that -- a group most of us are in most of the time.

Here's what he says:
__________

During the ACI FCPA conference held in Washington in November, the topic of documentation of agents came up. This is a familiar topic to anyone who has experience with the FCPA.

One of the points was that companies get hammered because they do a poor job of documenting or having the agent document their activities. I thought to myself "what would the agent document?" If they are out trying to drum up business what is it that they need to report? Do they report the golf trip with potential customers? Do they document the dinner they had or the train ride they took where they discovered a potentially new client and discussed opportunities?

This led me to ask what do business development people document for their activities? Surely they must provide something to justify their salaries. Shouldn't an agent's documentation be just as thorough? But then again, because a business development person is on salary and everyone knows they're sort of doing something, maybe they don't have to document very well. If they get results, some companies may ask "Does it matter?" If the documentation is poor or nonexistent, and all the focus (risk) is on agents, why wouldn't a company consider bringing agents in as business development employees? They could structure the compensation (salary and/or bonus) to be identical to what the agent already received. This would have the effect of moving the expense to payroll from agent commission or something similar.

Speaking from experience in conducting FCPA investigations, the scrutiny of payroll expense is night and day different from the scrutiny of commission or agent expense. Furthermore, perceived FCPA due diligence requirements are not the equal for employees as agents. What about the recording of a bonus as payroll expense when all or a portion is used to pay a bribe to a government official? The question then would be what is documented as the purpose of the bonus and did the company know about where the money would ultimately go?

We all know about the high level Jack Stanley-like business development people, but what about the local agents with cousins in the Ministry or uncles in Parliament. These are the guys that bring relationships to the table who might be hired as "employees" and be buried in payroll but continue on agents as if nothing really changed. . . .
_____________

Other readers with good or bad experiences dealing with intermediaries are invited to share their thoughts, anecdotes and advice about this difficult topic.
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Tuesday
Dec092008

Risk-Based Compliance

Guest blogger Scott Moritz (left) from Daylight Forensic & Advisory LLC says:

In response to Halliburton’s proposed acquisition of Expro, the U.S. Department of Justice recently thrust the concept of “a risk-based approach” to the forefront of anti-bribery compliance with Opinion Procedure Release 08-02. A risk-based approach has been a regulatory expectation in anti-money laundering (AML) for years. Now, with Release 08-02, it's moving to the FCPA as well.

The concept is simple: certain customers, vendors, and intermediaries represent a higher compliance risk than others. Geography, nexus to government officials, business type, method of payment, dollar volume -- all are risk indicators. A Kazakhstan-based customs broker owned by the brother of the country’s oil minister, with million-dollar payments directed to an account in Cyprus, represents a high risk of corruption. That's clear. The hard part is making appropriate distinctions and parsing them across a global, decentralized vendor system. It's that aspect that often requires the use of sophisticated technology.

Companies looking to strengthen their FCPA compliance can learn from successful AML programs. In fact, proven AML techniques are already part of some of the more progressive FCPA programs. The key to any risk-based approach? It's the strategic use of information technology, tracking and sorting the critical elements -- including risk-ranking, as well as enhanced due diligence and ongoing monitoring of high-risk parties proportionate to their risk profiles.

To mitigate risk, the first step is knowing where it comes from. That's why the DOJ instructed Halliburton in its Opinion Procedure Release to apply a risk-based approach to due diligence. As the financial institutions have learned, deploying the right technology can be the key to making that happen.

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Sunday
Nov092008

Fearing Third Parties

U.S. executives know that most Foreign Corrupt Practices Act compliance risks come from third parties -- overseas acquisition targets, joint venture partners, agents and others. Despite that knowledge, about three quarters of them think their company's due diligence of intermediaries isn't working. That's according to KPMG's 2008 Anti-Bribery and Anti-Corruption Survey.

Here are some findings from the survey based on responses from 103 executives at U.S. multinational companies:

  • 82 percent of the respondents said they face difficulties performing effective due diligence on foreign agents and other third parties.
  • 76 percent said they cannot adequately audit third parties for compliance.
  • 73 percent said their mergers and acquisition due diligence is sub par.
  • 27 percent said their level of M&A due diligence is minimal.
Eighty-five percent of the respondents said their company has a formal FCPA or anti-corruption compliance program. That's good. What's not good is that the programs aren't dealing effectively with the greatest compliance risk of all -- third parties. No wonder Justice Department and SEC enforcement actions under the FCPA are still rising -- they more than doubled last year -- and why most U.S. company executives are still worried about violating the FCPA.

Recent cases involving individuals illustrate how FCPA offenses can harm anyone caught in the mess. That's why, even in tough times, U.S. executives should demand the protection of an effective compliance program. They shouldn't accept compliance risks from third parties that can damage or destroy their companies, their careers, and their families.

View the 2008 KPMG Anti-Bribery and Anti-Corruption Survey here (courtesy of the White Collar Crime Prof Blog).

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Wednesday
Oct222008

Business Down, Compliance Risks Up

When times are tough and markets shrink, new international joint ventures sprout up everywhere. They're a fast and inexpensive way to expand commercial reach. JVs formed out of economic necessity often bring together companies that in good times are competitors. So their concerns about the arrangements usually focus on competitive risks, such as exposing their proprietary plans, customers lists, intellectual property and key personnel to potential poachers.

But another joint venture-related risk is compliance with the Foreign Corrupt Practices Act. Companies new to joint venturing may not understand how easily their overseas partners' illegal practices can be imputed to them. More ominously, companies facing financial flak might take intentional risks for the sake of survival. The law, they convince themselves, doesn't really mean what it says. Joint venture partners, after all, are beyond their control and therefore beyond their legal responsibility. That's not true, of course. But when backed into a financial corner, priorities can shift -- with tragic results.

Compliance is never easy, and in bad times it's harder than ever. Potential partners, for example, may be evaluated only for their effectiveness, without regard to their reliability. So what's needed to police joint ventures? The steps below are minimum requirements for an effective compliance program -- in good times and bad:

Due Diligence. Take all necessary and prudent precautions through well-documented due diligence to ensure that business relationships are formed only with reputable and qualified joint venture partners.

Board or Management Reviews. Examine the suitability of all prospective joint venture partners for purposes of compliance with the Foreign Corrupt Practices Act. Review the adequacy of due diligence performed in connection with the selection of overseas partners, as well as the joint venture's selection of agents, subcontractors and consultants for business development outside the United States. Reviewers should not be subordinate to the most senior officer of the Company's department or unit responsible for the relevant transaction.

Compliance Obligations in the Joint Venture Documents. Include in all joint venture agreements representations and undertakings by the joint venture partners, with periodic re-certifications, that no payments of money or anything of value have been or will be offered, promised or paid, directly or indirectly, to any foreign officials, political parties, party officials, or candidates for public or political party office, to influence the acts of such officials, political parties, party officials, or candidates in their official capacity, to induce them to use their influence with a government or an instrumentality thereof to obtain or retain business or gain an improper advantage in connection with any business venture or contract in which the Company is a participant

Audits and Approvals. Retain audit rights over the joint venture. Agree with all partners that the joint venture will not hire an ­agent, subcontractor or consultant without the Company's prior written consent (to be based on adequate due diligence).

Right to Terminate. Make sure all joint venture documents allow for immediate and unfettered termination for any breach of compliance-related obligations.

View other posts about joint ventures here.

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Thursday
Jul172008

Why We Keep Plugging

It's a familiar and unwelcome moment. Those on the other side of the table spot the FCPA compliance language for the first time:

The joint venture and all its personnel shall comply in all respects with the requirements of the United States Foreign Corrupt Practices Act.
Faces darken. The mood in the room goes sour.

"What's this?" they ask. "U.S. law doesn't have anything to do with our joint venture."

You start explaining: "The FCPA outlaws public bribery by Americans outside the United States. American companies are obligated to comply wherever they do business. Part of that is making sure their overseas partners don't pay bribes . . . "

"Excuse us," they say. "Our new joint venture isn't an American company and we're not Americans. Forget it. Anyway," they add, "our country has its own anti-corruption laws. And we always obey THEM."

It's going to be a long day. Lots of long days.

_____________

Reactions overseas to the FCPA range from mild irritation to vein-popping outrage. It's understandable. The law is sometimes seen as another example of America's arrogance and overreaching, a violation of sovereignty -- legal imperialism at its worst, and high-handed global moralizing. But that's a bum rap. Really.

The FCPA's aim isn't to change the world. It's to stop U.S. companies and their people from bribing foreign officials to obtain or retain business. That's clear from the early debates. Congress didn't want Americans bribing foreign government officials. Doing that, lawmakers and regulators said, distorts competition, ruins reputations, harms local populations and interferes with the foreign policy of the U.S. government.

But people always look for loopholes and shortcuts, so the FCPA takes that into account. It outlaws bribes to foreign officials that are paid directly or indirectly. And it's the indirectly part that causes so much upset overseas.

The FCPA says you can't hire an agent to pay bribes for you. You can't use joint venture partners for the dirty work either. You can't use a brother-in-law or charitable foundation or any other circuitous route. Bribes to foreign officials that originate from your hand are always your responsibility, no matter how indirectly you try to pass them on.

So when American companies go abroad, they have to make sure their business partners -- suppliers, subcontractors, professional advisors, agents and, of course, joint venture partners -- don't pay bribes to foreign officials to help the business. Taking steps to prevent that is required by an effective compliance program. Companies that don't try to stop intermediaries from paying bribes have no real defense under the FCPA when problems happen.

Does explaining all this (and a lot more) to overseas business partners help? Does it soothe their bruised pride and wounded nationalism? Yes, it usually helps, but the process isn't easy. Let's face it -- the FCPA makes people mad. Take due diligence: What contacts have you had for the past five years with any government or government-controlled entity? Are you now paying or have you ever paid bribes to anyone in any government? Can we ask your lawyer, banker, accountant and business associates if you're trustworthy? Those sorts of questions never sound friendly.

To get deals done overseas, though, it's necessary to explain what the FCPA is, what it's meant to accomplish, and how it works. That's good compliance and good business -- and worth fighting for.

So what's better? Spending a few extra hours or days at the negotiating table to do the right thing at the start, or spending years or even a lifetime trying to repair the terrible damage that an FCPA offense can cause?

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Wednesday
Jun252008

Halliburton, Expro and Umbrellastream Star In Opinion Procedure Release 08-02

Halliburton's messy battle to acquire British firm Expro via a hostile takeover has been big news in the global business press, with Halliburton up one day and down the next, but fighting on and on. Now, though, the story isn't just big news in the business press. It's big news too in the FCPA press (whatever that is). So what's going on?

Halliburton is the Requestor in the Justice Department's latest Foreign Corrupt Practices Act Opinion Procedure Release No.: 08-02 (June 13, 2008). It's trying to acquire all the shares of the Target, which isn't identified in the Release but is Expro International Group PLC, a U.K.-based company traded on the London Stock Exchange. Expro -- with about 4,000 employees throughout the world -- provides well-flow management for the oil and gas industry.

Competition for Expro comes from a group of foreign investors. In the Release they're called the Competitor but in real life they're known more picturesquely as Umbrellastream.

Halliburton's problem is that it can't do much due diligence because of "U.K. legal restrictions inherent in the bidding process for a public U.K. company." So for FCPA compliance, it's buying a black box. And that's why it's asking the DOJ what will happen if Expro has been paying bribes to foreign officials to obtain business.

Will Halliburton be held responsible for Expro's past FCPA offenses, if there are any, or for violations after the acquisition but before Halliburton has a chance to clean up any compliance problems? Halliburton is worried -- as it should be.

Like most oil and gas services firms, Expro operates in high-risk countries and deals directly with government-owned customers. Halliburton may already have seen evidence of non-compliance but can't say anything now because it signed a non-disclosure agreement with Expro. (In a footnote, the DOJ warns would-be requestors not to limit their ability to put all the facts in an Opinion Request by signing non-disclosure agreements. But it lets Halliburton get away with it this time.)

While Halliburton would like to condition its bid on successful FCPA and anti-corruption due diligence and pre-closing remediation, it can't do that. Umbrellastream's bid is unconditional and unless Halliburton's is the same, it will automatically lose.

The DOJ says it's OK to proceed. But to get the green light, Halliburton has promised to pay a very high price. And that "price" is what makes Release 08-02 unique among all Releases.

If Halliburton wins Expro, it must meet with the DOJ right away and disclose information it has that "suggests that any FCPA, corruption, or related internal controls or accounting issues exist or existed at the Target." That's the kick-off.

Ten days later it will give the DOJ . . .

. . . a comprehensive, risk-based FCPA and anti-corruption due diligence work plan which will address, among other things, the use of agents and other third parties; commercial dealings with state-owned customers; any joint venture, teaming or consortium arrangements; customs and immigration matters; tax matters; and any government licenses and permits. Such work plan will organize the due diligence effort into high risk, medium risk, and lowest risk elements.
Then there are milestones at 90, 120 and 180 days, by when Halliburton must have finished the three "risk" phases of due diligence, all the while providing periodic reports to the DOJ.

Meanwhile Halliburton will impose on Expro its Code of Business Conduct and specific FCPA and anti-corruption policies and procedures; it will give all employees compliance training; fire agents and suppliers who aren't being retained; and require agents and others being retained to sign new contracts that include FCPA and anti-corruption representations and warranties.

In another feature new to Opinion Procedure Releases, Halliburton represents that after the closing it won't divest any of Expro if the DOJ is investigating Expro or "any of its officers, directors, employees, agents, subsidiaries, and affiliates." And no matter what, Expro and all its subsidiaries and affiliates will "retain their liability for past and future violations of the FCPA, if any."

That's not an express waiver of any and all available defenses, but it's close. And anyway, Halliburton will already have given the DOJ all the evidence of Expro's FCPA violations, which the DOJ would then be able to use to charge Expro, along with its aforesaid "officers, directors, employees, agents, subsidiaries, and affiliates."

No wonder the DOJ says that giving Halliburton the go-ahead to buy Expro (and expose everyone there to criminal enforcement action after the closing) "advances the interests of the Department in enforcing the FCPA . . . ."

People from Expro reading Release 08-02 must be seriously cheesed off. Is Halliburton promising to deliver their heads to the DOJ on a platter if they've ever done anything that would or could violate the FCPA? Well . . . . So will it surprise anyone if Expro's leaders aren't overjoyed by Halliburton's bid?

View DOJ Opinion Procedure Release 08-02 here.

______________

As a postscript, here are excerpts from one of many current press reports about Halliburton's tortuous efforts to snare Expro. This is from the Financial Times :

UK court delays Expro sale to Umbrellastream

By Michael Kavanagh and Megan Murphy in London

Published: June 23 2008 20:32 | Last updated: June 23 2008 22:41

Halliburton locked horns with the Takeover Panel on Monday over its failed attempt to kick-start an auction for Expro International, as the High Court postponed its approval of the sale of the British oil services company to a rival bidder.

During a dramatic hearing in London, Halliburton and Mason Capital, a US hedge fund that holds a 7.1 per cent stake in Expro, won a two-day delay on efforts to gain a court sanction on the sale of the UK company to the Candover-led consortium Umbrellastream for £1.8bn. . . .

The High Court’s decision to postpone the hearing is the latest twist in a fiercely contested takeover battle. . . .

Expro says that Halliburton’s bid, while 10p higher, was inadequate given the delays and risks associated with that deal. . . .

Tuesday
May202008

More Than Normally Careful

Due diligence is a common subject, so it's natural to think of it as an easy subject as well. But it's not. There's no black-letter law anywhere describing due diligence, or what type is needed for an effective compliance program under the Foreign Corrupt Practices Act, or how much should be done. Surprisingly, the FCPA itself never mentions it. The statute describes what behavior constitutes an offense, and lists a few things that don't -- facilitating payments, promotional expenses and payments allowed under the written laws of the host country. But it doesn't mention due diligence.

Where, then, does due diligence come from? As with so many aspects of compliance, the Federal Sentencing Guidelines are the fountainhead. They leave no doubt that due diligence is an essential ingredient of compliance. But even the Guidelines don't give examples, checklists, or timetables. They leave the "details" to those who know the organization best -- its directors, officers and executives. Instead of being a compliance how-to, the Guidelines describe the hallmarks of an organization whose intention is to comply. One hallmark -- you guessed it -- is due diligence. There's even some case law on the topic that's helpful.

In re Holland Furnace Company et al., 341 F.2d 548 (7th Cir., 1965) is a leading decision. Paraphrasing its holding and applying it to FCPA due diligence, the case says an organization must be able to demonstrate, on the basis of the entire record, and through the acts of certain of its officers, agents, representatives and employees, that it didn't knowingly, willfully or intentionally violate any prohibitions found in the law. And doing all that is the job of the due diligence.

Another leading case on the evidence of an organization's intention to comply is U.S. v. Greyhound Corporation. There, the Seventh Circuit was referring to compliance with a court order. But it could have been talking about a company's legal duty to comply with the FCPA (or any other criminal statute). In distinguishing between genuine and bogus compliance, the court said:

"Similarly, while actions showing a good faith effort to comply with the order will tend to negate willfulness, . . . delaying tactics, indifference to the order, or mere 'paper compliance' will support a finding of willfulness. In re Holland Furnace Co., 341 F.2d 548, 551 (7th Cir. 1965), cert. denied, 381 U.S. 924, 85 S.Ct. 1559, 14 L.Ed.2d 683. The very issuance of the order puts the party on notice that his past acts have been wrongful. 'No concept of basic fairness is violated by requiring a person in this position to be more than normally careful in his future conduct.' United States v. Custer Channel Wing Corp.,247 F.Supp. 481, 496 (D.Md.1965), aff'd, 376 F.2d 675 (4th Cir. 1967), cert. denied, 389 U.S. 850, 88 S.Ct. 38, 19 L.Ed.2d 119."

U.S. v. Greyhound Corporation, 508 F.2d 529 (7th Cir., 1974).

So an organization accused of criminal conduct can show that it intended to comply with the law by being "more than normally careful." For the FCPA, that means there has to be due diligence that's appropriate to the circumstances. If the host country is known to tolerate public corruption, for example, then being "more than normally careful" will involve more due diligence. Again, the more risk of an FCPA offense, the more effort is needed to keep the offense from happening.

Finally, then, the record of the company's due diligence (of its being "more than normally careful") becomes the evidence that the company didn't knowingly, willfully or intentionally violate the law. An FCPA offense requires willful and knowing conduct, so a record of due diligence demonstrating a lack of willfulness and knowledge might be the organization's best and only defense. That's why due diligence has to be at the center of any effective compliance program. It's the proof that the company intended to comply all along.

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There's no doubt that due diligence is woven into the fabric of any true compliance culture. For readers wanting to know a bit more, we set out below the references to due diligence in the Federal Sentencing Guidelines under "Effective Compliance and Ethics Program." Here's what the Guidelines say:

-- To have an effective compliance and ethics program, for purposes of subsection (f) of §8C2.5 (Culpability Score) and subsection (c)(1) of §8D1.4 (Recommended Conditions of Probation - Organizations), an organization shall—

(1) exercise due diligence to prevent and detect criminal conduct . . . .

* * *

-- Due diligence and the promotion of an organizational culture that encourages ethical conduct and a commitment to compliance with the law within the meaning of subsection (a) minimally require the following:

(1) The organization shall establish standards and procedures to prevent and detect criminal conduct.

(2) (A) The organization’s governing authority shall be knowledgeable about the content and operation of the compliance and ethics program and shall exercise reasonable oversight with respect to the implementation and effectiveness of the compliance and ethics program.

(B) High-level personnel of the organization shall ensure that the organization has an effective compliance and ethics program, as described in this guideline. Specific individual(s) within high-level personnel shall be assigned overall responsibility for the compliance and ethics program.

(C) Specific individual(s) within the organization shall be delegated day-to-day operational responsibility for the compliance and ethics program. Individual(s) with operational responsibility shall report periodically to high-level personnel and, as appropriate, to the governing authority, or an appropriate subgroup of the governing authority, on the effectiveness of the compliance and ethics program. To carry out such operational responsibility, such individual(s) shall be given adequate resources, appropriate authority, and direct access to the governing authority or an appropriate subgroup of the governing authority. . . .

* * *

-- The organization shall use reasonable efforts not to include within the substantial authority personnel of the organization any individual whom the organization knew, or should have known through the exercise of due diligence, has engaged in illegal activities or other conduct inconsistent with an effective compliance and ethics program.

* * *

-- High-level personnel and substantial authority personnel of the organization shall be knowledgeable about the content and operation of the compliance and ethics program, shall perform their assigned duties consistent with the exercise of due diligence, and shall promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.

* * *

-- [T]he organization shall hire and promote individuals so as to ensure that all individuals within the high-level personnel and substantial authority personnel of the organization will perform their assigned duties in a manner consistent with the exercise of due diligence and the promotion of an organizational culture that encourages ethical conduct and a commitment to compliance with the law . . .

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View Chapter 8 - PART B - §8B2.1. ("Effective Compliance and Ethics Program") of the 2005 U.S. Federal Sentencing Guidelines here.

Monday
Feb252008

A Little Help From Our Friends

Our subject is always some aspect of the the Foreign Corrupt Practices Act. So around here the U.S. Department of Justice and the Securities and Exchange Commission get lots of attention. But another U.S. government agency has a role to play in the FCPA -- the Department of Commerce. Its mission is "to foster, promote, and develop the foreign and domestic commerce" of the United States. It does that by helping -- that's right, helping -- American companies do business overseas. And what interests us is how Commerce helps U.S. companies comply with the FCPA.

First, some background. The Department of Commerce concentrates most of its efforts on small and medium sized U.S. exporters. That makes sense. According to a 2004 USTR fact sheet, in the United States small and medium sized businesses make up almost 97% of all direct exporters, and approximately 65% of exporters are businesses with fewer than 20 employees. As our readers know, smaller companies with fewer resources struggle to comply with the FCPA. Big companies aren't excluded from Commerce's programs, but they usually know how to do buisness overseas and comply with the FCPA, and they have the resources to do so on their own. So it's the smaller companies that need the most help. With that in mind, let's see what Commerce has to offer.

Finding a partner. The Department of Commerce helps U.S. companies find business partners or agents overseas. Its Commercial Service -- a group of trade and business experts stationed in about 80 U.S. embassies around the globe -- runs the International Partner Search Program. It actually identifies suitable strategic partners for U.S. exporters. As Commerce says, "You provide your marketing materials and background on your company, and the [Commercial Service] will use its strong network of foreign contacts to interview potential partners and provide you with a list of up to five pre-qualified partners. This information is available in 30 days or less."

Vetting the candidate. Once a potential overseas partner or agent is found, either through Commerce or otherwise, it's time for some compliance-oriented due diligence. As we've said before, international joint venture partners and sales agents bring very high risks under the FCPA. Unreliable partners and agents -- those who might pay bribes to foreign officials to help the business -- need to be spotted early and either avoided or controlled. Doing that requires due diligence. And here again Commerce can help.

The Commercial Service's International Company Profile (ICP) Program provides background reports on foreign companies in about 80 countries. The price is reasonable -- around $500 per ICP, depending somewhat on local costs. Be warned, however, that the Commercial Service doesn’t offer ICPs in countries where Dun & Bradstreet or other private-sector vendors already provide a similar service. But where ICPs are available, the Commercial Service specialists deliver a product that helps satisfy at least the basic level of due diligence.

International Company Profiles are assembled by combing the local press, industry contacts and other sources. The result is a financial report on the prospective overseas partner or agent. Some ICPs are more detailed than others, depending on both the amount of information ultimately available and on the resourcefulness of the local Commerce specialist. Delivery time is advertised to be about 10 business days. The final report includes "a list of the company's key officers and senior management, banking relationships and other financial information about the company; and market information, including sales and profit figures, and potential liabilities."

Uncle Sam's opinion. Crucial to FCPA due diligence, the Commercial Service will also provide "an opinion as to the viability and reliability of the overseas company or individual you have selected as well as an opinion on the relative strength of that company's industry sector in your target market." It's not called an FCPA due diligence opinion, but that's practically what it amounts to. Sure, there are lots of scenarios by which a "reliable" overseas partner or agent might still cause FCPA problems. But the International Company Profile and the viability and reliability opinion are great evidence. They demonstrate how the U.S. company tried to pick a law-abiding foreign partner or agent. In most cases, evidence like that goes a long way to protecting U.S. companies and executives who find out later that an overseas intermediary may have caused an FCPA violation.

Our recommendation. We've dealt with people from the Commercial Service in a number of countries. Overall, the specialists are unabashed boosters of American business overseas. They have impressive, even astounding knowledge about local markets, and they're resourceful as well. We've met some with a great sense of humor, which is a welcome relief in countries in transition and under stress.

In fact, we can't think of any reason why straight-shooting smaller companies shouldn't check in with a Commercial Service specialist -- either in the U.S. or the country of destination. There are literally hundreds of Commercial Service offices -- across the U.S. from Akron to Ypsilanti, and around the world from Albania to Zimbabwe. The chats are free and may ultimately contribute richly to successful overseas business development and effective FCPA compliance.

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A special acknowledgment to Kathryn Nickerson, Senior Counsel, Office of the Chief Counsel for International Commerce, U.S. Department of Commerce, for some of the information and ideas in this post. See her speech to the American Bar Association, National Institute of the Foreign Corrupt Practices Act, Special Focus: Issues Faced By Small and Medium Enterprises, Washington, D.C., October 17, 2006 here.

_________________

View the Department of Commerce's International Company Profile Program here.

Thursday
Jan172008

FCPA Release 08-01 Goes The Distance

The first Foreign Corrupt Practices Act Opinion Procedure Release of 2008 is out. It's the longest Release we know of -- just over twelve pages, and packed with details. It tells of a proposed investment in an overseas privatization, a raft of due diligence, tough and prolonged negotiations, yet more due diligence, and a final victory for compliance. The Release shows by its length, dense content and quick turnaround by the Department of Justice -- 13 days from Request to Release -- the new levels of awareness and effort that characterize modern FCPA compliance. Here's the short version:

The Players and the Proposed Transaction. The Requestor is a U.S. Fortune 500 company. It sought approval from the DOJ for a majority investment in the Target -- a foreign company that manages public services for a major foreign municipality. Compliance complications arose because a private citizen of the host country (the "Foreign Owner") was the ultimate controlling shareholder of the Target, which he jointly owned with the foreign government. After the Requestor's investment, the Foreign Owner would eventually buy out the government's interests. He would also remain a minority owner and enter into a joint venture with the Requestor. Due to his various roles and relationships with the foreign government, the Requestor deemed him to be a "foreign official" for purposes of the FCPA, 15 U.S.C. § 78dd-1(f)(1)(A) -- at least until he acquired all of the government's interests. The foreign government and the Foreign Owner himself disputed his status as a "foreign official," but the DOJ evidently agreed with the Requestor.

The Problem and the Solution.
When the bids for the privatization were in, the Requestor's bid valued the potential controlling interest in the Target at a significant premium. Although there was ample commercial support for the valuation, the Requestor became concerned that its payments to the Foreign Owner (as a "foreign official") could violate the FCPA. Working under tight deadlines imposed by the privatization rules, the Requestor decided to seek an Opinion from the DOJ on an expedited basis. In under two weeks, the DOJ considered the Request and determined that the payments would not violate the FCPA. It based its Opinion on the Requestor's extensive due diligence, the transparency of the transaction, the commercial valuation of the bid, the undertakings by both the Requestor and the Foreign Owner, and the terms and conditions of the joint venture between them.

The Due Diligence. The Requestor's due diligence was the most comprehensive yet described in a Release -- and we commend it as a useful guide. Here's the list:

-- The Requestor commissioned a report on the Foreign Owner by a reputable international investigative firm.

-- The Requestor retained a business consultant in the foreign municipality who provided advice on possible due diligence procedures in the foreign country.

-- The Requestor commissioned International Company Profiles on the Target and related entities from the U.S. Commercial Service of the Commerce Department.

-- The Requestor searched the names of all relevant persons and entities involved with the transaction from the Target's side, through the various services and databases accessible to the Requestor's International Trade Department -- including a private due diligence service -- to determine that no relevant parties were included on lists of designated or denied persons, terrorist watches, or similar designations.

-- The Requestor met with representatives of the U.S. Embassy in the foreign municipality and learned that there were no negative records at the Embassy regarding any party to the proposed transaction.

-- Outside counsel conducted due diligence and issued a preliminary report, to be followed by a final report before the closing.

-- An outside forensic accounting firm prepared a preliminary due diligence report with a final report to be completed before the closing.

-- A second law firm reviewed all of the due diligence.

Transparency. A lack of transparency in the sale of public assets to private parties is a compliance red flag. The Requestor worked hard to satisfy itself that the proposed transaction was known to the relevant authorities and entirely legal under the host country's laws. Although the Foreign Owner initially objected to any disclosure about his role, the Requestor eventually overcame his objections. Then the Requestor met with numerous officials and lawyers of the foreign government. It received assurances from multiple sources that the proposed transaction -- and specifically the Foreign Owner's role in it -- were adequately disclosed and compliant with local law. Only then did the Requestor resume negotiations with the Foreign Owner and perform additional due diligence.

Lessons Learned. A couple of notable features emerge. First, as the full text of the Release makes clear, the Requestor was unrelenting in its due diligence. It ran into obstacles and resistance but worked through them -- probably at the risk of offending the Foreign Owner and spoiling the deal. That business risk is present in most proposed overseas joint ventures. There is, unfortunately, something at least mildly insulting about the aggressive due diligence needed under an effective compliance program. Typically, when potential foreign partners perceive an insult and complain, the response is to throttle back the due diligence. Here, though, the Requestor pressed forward with its compliance duties.

Second, the final form of the transaction embodied all the right compliance features. The Foreign Owner represented and warranted that there had been no past violations of antibribery laws, including the FCPA, and that there would be none in the future. He said there were no other foreign officials involved. And crucially, he agreed to include in the joint venture documents potent remedies in case of breach -- including termination of the relationship, dissolution of the joint venture company, and a buy-out of the other party's interests. That's the unfettered remedial action needed to ensure FCPA compliance in a joint venture. By contrast, an earlier post called The Requestor's French Dilemma told how the DOJ refused to endorse a proposed overseas joint venture. The problem was that the Requestor could exit only if a compliance breach rose to a "materially adverse" level. The DOJ said,

"Should the Requestor's inability to extricate itself [from the joint venture] result in the Requestor taking, in the future, acts in furtherance of original acts of bribery by the French company, the Requestor may face liability under the FCPA. Thus, the Department specifically declines to endorse the 'materially adverse effect' standard."

Kudos in this case to the Requestor -- for its determination to do a complicated and important foreign transaction and yet comply in all ways with the FCPA. And to the DOJ -- for its extraordinary responsiveness in a fast-moving deal. It ran the mile in record time.

View Opinion Procedure Release No. 08-01 (January 15, 2008) Here.

View Prior Posts About Overseas Joint Ventures Here.

Monday
Jan072008

When Is Charity A Bribe?

No good deed goes unpunished, or so the saying goes. That sure came true for Schering-Plough a few years ago. From February 1999 to March 2002, the New Jersey-based maker of Afrin, Claritin, Coricidin and Cipro, among other leading drugs, violated the Foreign Corrupt Practices Act through overseas charitable giving.

According to the Securities and Exchange Commission's June 2004 complaint, the company's subsidiary in Poland made improper payments to a charitable organization called the Chudow Castle Foundation. The Foundation was headed by an individual who was the director of the Silesian Health Fund during the relevant time. The health fund was a Polish governmental body that, among other things, provided money for the purchase of pharmaceutical products and influenced the purchase of those products by other entities, such as hospitals, through the allocation of health fund resources.

The SEC said Schering-Plough Poland paid 315,800 zlotys (approximately $76,000 at the time of the payments) to the Chudow Castle Foundation to induce its director to influence the health fund's purchase of Schering-Plough's pharmaceutical products. The SEC also said that none of the payments to the Foundation were accurately reflected on the subsidiary's books and records and that Schering-Plough's system of internal accounting controls was inadequate to prevent or detect the improper payments.

As a result, Schering-Plough paid a $500,000 civil penalty and consented to an SEC order requiring it to avoid violating Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. It also had to retain an independent consultant to review its policies and procedures regarding compliance with the Foreign Corrupt Practices Act and implement any changes recommended by the consultant.

Schering-Plough's case, as far as we know, remains the only FCPA prosecution based entirely on charitable giving. We're talking about it now because it raised important compliance concerns that still linger. For example, how much due diligence is expected of companies with respect to their overseas charitable donations? At an FCPA conference last year, an audience member popped that question to Mark Mendelsohn, the head of the Department of Justice's group that prosecutes FCPA cases. He said each donation has to be considered on its merits, but there are always common-sense guidelines that help determine if donations could violate the FCPA. Is there a nexus between the charity and any government entity from which the company is seeking a decision? If the governmental decision-maker holds a position at the charity, that's a red flag. Is the donation consistent with the company's overall pattern of charitable contributions? For Schering-Plough, the SEC said that "[d]uring 2000 and 2001, the payments constituted approximately 40% and 20%, respectively, of S-P Poland's total promotional donations budget. Moreover, the Foundation was the only recipient of such donations that received multiple payments, making the four payments in 2000 and seven payments in 2001 highly unusual." If one donation or a series of them is more than the company has made to any other charity in the past five years, that's a red flag too.

Beyond the points made by Mr. Mendelsohn, there are other smell tests for charitable donations. Who initiated the request for payment to the charity? The key to most bribery charges appears to be the personal benefit to the government official, or the quid pro quo expected of him or her. If a government official hinted at or begged for a payment to the charity, that's another red flag. Will there be a tax deduction for the donation? In most countries, one important result of any gift to charity is tax relief. Therefore, not seeking the tax benefit can become yet another red flag.

And one final point. All due diligence concerning charitable payments -- the asking and answering of the questions posed above -- should be well documented. Nothing will aid in defending against a potential FCPA charge more than a stack of contemporaneously-generated papers backing the story that the payment really was meant to be a charitable contribution and not a bribe. Don't be shy about it. Create real-time documents that demonstrate awareness of potential FCPA issues and measures taken to manage and mitigate the risk. That, after all, is what compliance is really about.

Schering-Plough Corporation trades on the New York Stock Exchange under the symbol SGP.

View the SEC's Litigation Release No. 18740 / June 9, 2004 Here.

View the SEC's June 9, 2004 complaint against Schering-Plough Here.

As a postscript, we need to say how much we like what's written above. That sounds like outrageous braggadocio, but it's not. Our friend, Pete from D.C., is the inspiration and chief draftsman of this post. Despite his encyclopedic knowledge of the FCPA and vast experience in its application, he chooses to remain an anonymous contributor to these pages. We can only thank him yet again for his interest and great help in our work here -- and encourage him once more to reveal to the world his almost handsome face.