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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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.
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