Transaction Issues And Considerations

• Author: Robert W. Tarun
• Profession: Former Executive Assistant U.S. Attorney in Chicago
• Pages: 133-178

CHAPTER 5

Transaction Issues

and Considerations

I. OVERVIEW

Persons transacting business internationally must always consider possible issues

arising under the Foreign Corrupt Practices Act (FCPA).1 While these issues are

particularly relevant in the contractual context of the sale of goods or services to

foreign governments and their instrumentalities, FCPA issues can arise as well in

the context of purely private-sector transactions. For example, an improper pay-

ment to a foreign government official to obtain a license to commence or continue

a business activity, such as a telecommunications license, may equally present an

FCPA violation. General counsel and transaction counsel must be sensitive to

FCPA issues in all international transactions, regardless of the direct or indirect

role of or existence of a contract with a governmental entity.2

A second significant issue is that some transaction counsel mistakenly consider

FCPA potential exposure only in situations of “intermediaries” (e.g., agents, com-

mission sales representatives, or consultants) who could be possible conduits or

payors of an improper payment. Multinational companies must undertake appro-

priate review and due diligence in connection with potential mergers, acquisitions,

and joint ventures (JVs) as well.

The March 2005 DOJ–SEC case against Titan Corporation demonstrated how

a shrewd suitor can protect itself through careful due diligence in connection with

a merger (discussed in chapter 10).3 Similarly, Monsanto’s acquisition of Delta &

Pine demonstrated how an acquirer protected itself from successor criminal liability

when it discovered improper payments by the target to Turkish Ministry of Agricul-

ture officials.4 In contrast, Pfizer acquired Wyeth in 2009 and there was significant

improper payment conduct5 that Pfizer had to investigate and eventually disclose.

FCPA issues arise in transactions involving foreign investments or acquisitions, JVs,

licensing arrangements, infrastructure projects, offset and countertrade agreements,

and mergers. Also, a company may face FCPA liability for the actions of a JV partner

or a subcontractor and its employees and agents. Increasingly, acquirers have urged, if

not required, targets to voluntarily disclose problematic payments to the Department

of Justice and the Securities and Exchange Commission before a transaction closes.

Companies operating internationally should implement procedures and steps

to assure that FCPA and related antibribery compliance considerations are taken

into account in every overseas transaction. General counsel and transactional

133

tar51556_05_ch05_133-178.indd 133 5/4/15 2:22 PM

134 CHAPTER 5

counsel must ensure that the following elements are systematically included in

reviewing and implementing all overseas transactions:

• Selection criteria. Agents, consultants, customs clearing brokers, sales represen-

tatives, partners, distributors, professionals (attorneys and accountants), or

other third-party contractors (collectively “third-party representatives”) must

be identified and selected on the basis of objective and written evaluation

criteria; for example, a partner is selected on the basis of identifiable commer-

cial and technical competence and not because he or she is the relative of an

important government official.

• Reasonableness of price or compensation. In reviewing an acquisition or other trans-

action, counsel should review the economics of the contemplated transaction

or agency; for example, is the agency fee reasonable given the contemplated

services? Unsupported general statements or folklore that “10 percent finder’s

fees are common in the industry or region” should be viewed with skepticism.

• Target of joint venturer’s business with foreign governments. In considering a tar-

get or JV partner, one should consider the volume and percentage of the

acquiree’s business derived from foreign government contracts as well as its

countries of operation (see Transparency International’s Corruption Percep-

tion Index at section III.A).

• Due diligence and reputation check. Third-party representatives should be objec-

tively evaluated and due diligence undertaken into their contracts, business

reputation, qualifications, ownership, and integrity. Depending upon the

scope of the contemplated relationship and other factors, due diligence may

include (1) obtaining an independent background report that identifies red

flags; (2) reviewing the preliminary background report and any identified red

flags; (3) reviewing company questionnaires completed by the representative;

(4) reviewing the representative’s government contracts; (5) reviewing the

representative’s foreign government touchpoints, for example, customs, per-

mits, and licenses; (6) checking other sources of information (Internet, public

databases); (7) checking business references provided by the potential third-

party representative; (8) interviewing third-party representatives face to face

whenever possible; (9) obtaining information from U.S. government sources

(Department of Commerce business liaison and State Department desk office

inquiries); and (10) obtaining information from institutions (banks, account-

ing firms, lawyers) in the third-party representative’s country of operations.

Due diligence efforts should be memorialized.

• Contract provisions. Written agreements with third-party representatives must

be within the norm for and consistent with standard arrangements in the

industry or geographic sector. The agreements should specify duties or ser-

vices to be provided by agents, consultants, or contractors. The agreements

must contain standard anticorruption representations, warranties, covenants,

and the like. The agreements should also provide for audit rights, annual or

periodic FCPA certifications, and termination for breach of any representa-

tions, warranties, covenants, or other FCPA-related requirements.

• Related and unrelated agreements. Transactional counsel must consider the big pic-

ture to assure that a third-party representative is not possibly structuring the

tar51556_05_ch05_133-178.indd 134 5/4/15 2:22 PM

Transaction Issues and Considerations 135

transaction and related or unrelated agreements so as to generate funds, with

or without the company’s explicit knowledge, and utilizing the funds to make

improper payments. Particular business arrangements and structures may not

make economic sense and should heighten concerns about funds being deliv-

ered to third-party representatives to facilitate improper payments. For example,

SEC enforcement attorneys have evaluated unrelated offshore or third-country

investment projects, offset and counter trade arrangements, inflated subcon-

tracts, and contracts for “advisory” or other vaguely defined services.

• Relationship of directors, officers, or employees to foreign government officials. Trans-

actional counsel will want to determine whether employees, officers, or direc-

tors of a target company, JV, partner, or agent are relatives or close associates

of foreign government officials.

• Subject of law enforcement investigations. Transactional counsel will want to

explore directly with the third-party representative and through other sources

whether the third party or its owners, directors, officers, or employees has

been the subject of any DOJ, SEC, Interpol, or in-country law enforcement

investigation or the recipient of any subpoena or correspondence from any of

these law enforcement agencies.

• Red flags. There are certain “signaling devices” or “red flags” that should put

transactional counsel on notice to review a transaction carefully, since such

signs are possible indications that improper payments may be intended by

third-party representatives.

II. EXAMPLES OF AGENT, CONSULTANT, AND OTHER

THIRD-PARTY REPRESENTATIVE RED FLAGS

Certain signs or the lack of transparency in accounting records may suggest that

improper payment activity has occurred or may be occurring. Standing alone, these

red flags certainly do not prove the existence of illicit or improper activity. However,

they may suggest the need for further inquiry and economic justification for cer-

tain business arrangements as well as greater vigilance and increased audit activity.

Twenty-five third-party warning signs that can portend FCPA problems are

listed next. Although these red flags focus on agents and consultants, they apply

equally to joint venturers, contractors, distributors, and other business partners.

1. The agent or consultant resides outside the country in which the services are

to be rendered.

2. The commission payments to the agent or consultant are required to be made

outside the country and/or to a country linked to money laundering activity.

3. Company wire transfers do not disclose the identity of the sender or recipient.

4. The agent or consultant demands an unusually high commission without a

corresponding level of services or risk (e.g., an agent who bears financial risks

on delivery of goods or performs substantial pre- or postsales services may be

entitled to greater compensation than a pure commission agent/broker).

5. The agent or consultant refuses to disclose its complete ownership, owner-

ship structure, or other reasonable requested information.

tar51556_05_ch05_133-178.indd 135 5/4/15 2:22 PM