Transaction issues and considerations

• Author: Robert W. Tarun
• Pages: 89-126

CHAPTER 5

Transaction Issues and

Considerations

I. OVERVIEW

Persons transacting business internationally must always consider possible issues

arising under the Foreign Corrupt Practices Act.1 While these issues are particu-

larly 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 con-

text of purely private-sector transactions. For example, an improper payment 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 viola-

tion. General counsel and transaction counsel must be sensitive to FCPA issues in

all international transactions, regardless of the direct or indirect role of or 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, acquisi-

tions, and joint ventures as well. The March 2005 DOJ–SEC case against Titan

Corporation demonstrated how a savvy 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 Agriculture officials.4 FCPA issues arise in trans-

actions involving foreign investments or acquisitions, joint ventures, licensing

arrangements, infrastructure projects, offset and countertrade agreements, and

mergers. Also, a company may face FCPA liability for the actions of a joint venture

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 anti-bribery compliance considerations are taken

into account in every overseas transaction. General counsel and transactional

counsel must ensure that the following elements are systematically included in

reviewing and implementing all overseas transactions:

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90 CHAPTER 5

1. Selection criteria. Agents, consultants, customs clearing brokers, sales repre-

sentatives, 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 evalu-

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

commercial and technical competence and not because he or she is the rela-

tive of an important government official.

2. Reasonableness of price or compensation. In reviewing an acquisition or

other transaction, 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.

3. Target of joint venturer’s business with foreign governments. In considering

a target or joint venture partner, one should consider the volume and per-

centage of the acquiree’s business derived from foreign government contracts

as well as its countries of operation (see Transparency International’s Corrup-

tion Perception Index at III.A).

4. Due diligence and reputation check. Third-party representatives should

be objectively 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 dili-

gence may include: (a) obtaining an independent background report that

identifies red flags; (b) reviewing the preliminary background report and

any identified red flags; (c) reviewing company questionnaires completed by

the representative; (d) reviewing the representative’s government contracts;

(e) reviewing the representative’s foreign government touchpoints, e.g.,

customs, permits, licenses, etc.; (f) checking other sources of information

(Internet, public databases); (g) checking business references provided by the

potential third-party representative; (h) interviewing third-party represen-

tatives face to face whenever possible; (i) obtaining information from U.S.

government sources (Department of Commerce business liaison and State

Department desk office inquiries); and (j) obtaining information from insti-

tutions (banks, accounting firms, lawyers) in the third-party representative’s

country of operations. Due diligence efforts should be memorialized.

5. Contract provisions. Written agreements with third-party contractors 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 anti-corruption representations, warranties, cov-

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

annual or periodic FCPA certifications, and termination for breach of any

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

6. Related and unrelated agreements. Transactional counsel must consider the

big picture to assure that a third-party representative is not possibly struc-

turing the transaction and related or unrelated agreements so as to gener-

ate funds, with or without the company’s explicit knowledge, and utilizing

Transaction Issues and Considerations 91

the funds to make improper payments. Particular business arrangements

and structures may not make economic sense and should heighten con-

cerns about funds being delivered 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 subcontracts, and contracts for “advisory” or

other vaguely defined services.

7. Relationship of directors, officers, or employees to foreign government officials.

Transactional counsel will want to determine whether employees, officers, or

directors of a target company, joint venture, partner, or agent are relatives or

close associates of foreign government officials.

8. 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.

9. 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, 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 post-sales 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.