fcpa compliance conducting due diligence on third parties november 10, 2015 jesica gilbert director...
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FCPA ComplianceConducting Due Diligence on Third Parties
November 10, 2015
Jesica Gilbert
Director of Ethics and Compliance
American Bureau of Shipping
Elsa Manzanares, Marla Poirot, and Michelle Schulz
Partners
Gardere Wynne Sewell LLP
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Marla Poirot
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Michelle Schulz
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Elsa Manzanares
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Overview
• Our focus today is practical guidance on how to conduct Foreign Corrupt Practices Act (FCPA) due diligence
– FCPA Red Flags
–Due Diligence Checklist
– Example
–How to analyze due diligence information you receive
–Recordkeeping
What are FCPA Risk Countries?
Consider
• As counsel to multi-national clients, what exposure have you had to the Foreign Corrupt Practices Act?
What Are FCPA Red Flags For You?
• Government Contacts–What was the nature of the contact with you
–Does the person claim to be an “insider?”
• Third-Party Intermediaries (“TPIs”) – e.g., brokers, agents, consultants–What was the nature of the contact with you?
–Does the TPI have a background in these transactions?
–What is your company’s history with the TPI? (know your customer)
Always ask yourself: is there something unusual about the way the person approached you or the way they want
to conduct business with you?
Other FCPA Red Flags to Watch
• Lack of formal anti-corruption policies or controls
• Doing business in countries with a high risk or history of public corruption
• Significant use or reliance on third party finders/influencers
• Lack of details in third party contracts
Other FCPA Red Flags to Watch (cont.)
• Requests for charitable contributions
• Sales to foreign government agencies
• Request for commission payments to un-related country
Other FCPA Red Flags to Watch (cont.)
• Excessive payments for services rendered
• Unusual payment terms (example: cash in advance)
• Unnecessary involvement of agents in transactions
Basic Elements of Effective FCPA Program
• Training
•Manual (policies and procedures)
• Designated Compliance Officer
• Due Diligence Procedures
Due Diligence Checklist
• Country Reputation
• Capabilities/Compensation
• Questionnaires/References
• Financial Information
• Interviews
Level and amount of due diligence will depend on the nature of the transaction, but basic elements are the
same.
Due Diligence Checklist - Example
• Example
–You are approached by a third party who claims to be an agent of the Minister of Agriculture of Nigeria. He wants to assist you with obtaining a contract with the Ministry of Agriculture. What due diligence steps do you take?
Step 1: What is Nigeria’s reputation for corruption?
Due Diligence Checklist – Example (cont’d)
• Example
–You are approached by a third party who claims to have contacts with the Ministry of Agriculture of Nigeria. He wants to assist you with obtaining a contract with the Ministry of Agriculture. What due diligence steps do you take?
Step 2: What are the capabilities of the TPI for doing this work? What compensation are they requesting?
Due Diligence Checklist – Example (cont’d)
• Example–You are approached by a third party who claims to have
contacts with the Ministry of Agriculture of Nigeria. He wants to assist you with obtaining a contract with the Ministry of Agriculture. What due diligence steps do you take?
Step 3: Request TPI complete FCPA questionnaire.
Due Diligence Checklist – Example (cont’d)
• Example–You are approached by a third party who claims to have
contacts with the Ministry of Agriculture of Nigeria. He wants to assist you with obtaining a contract from the Ministry of Agriculture. What due diligence steps do you take?
Step 4: Request financial information from TPI.
Due Diligence Checklist – Example (cont’d)
• Example–You are approached by a third party who claims to have
contacts with the Ministry of Agriculture of Nigeria. He wants to assist you with obtaining a contract from the Ministry of Agriculture. What due diligence steps do you take?
Step 5: Conduct interview of key representative(s) from the TPI’s company.
Reviewing the Information You Receive: Issues to Consider
• The country has a reputation for corruption(see the Transparency International Corruption Perceptions Index)
• The intermediary requests anonymity or that the relationship remain a secret
• The intermediary does not cooperate with the due diligence investigation or refuses to make representations and warranties
• The intermediary makes suspicious statements such as needing money to “get the business” or “make the necessary arrangements”
Reviewing the Information You Receive: Issues to Consider (cont’d)
• The intermediary has a reputation for unethical conduct, including previous termination for same, or previous civil or criminal penalties
• The intermediary has family or business ties to government officials (or was recommended by a government official)
• The intermediary makes large or frequent political contributions
Reviewing the Information You Receive: Issues to Consider (cont’d)
• The intermediary is not expected to perform substantial work
• The intermediary lacks the experience, staff or facilities to perform the required work
• The intermediary has poor financial stability or credit
How Do You Verify the Information Provided to You?
• If you have determined that there are limited or no red flags, you will still need to verify the information provided
–Example: The U.S. Commercial Service International Company Profile is cost effective, but it can be slow. Also, they do not conduct due diligence, they only validate references
• If there are significant red flags in high risk countries consider a comprehensive due diligence investigation by independent trained investigators
RECORDS RECORDS RECORDS
•What Records Should You Keep
– Your due diligence file should contain the following
• Detailed notes on telephone calls (date, time, name, title)
• Letters
• Emails
• Newspaper articles
• Denied party screening results
• Internet research – print it out!
• Reports (for example, background checks)
• Interview notes
• Your analysis of red flags
RECORDS RECORDS RECORDS (cont’d)
• Keep records during all steps in the due diligence process
– Keep copies of the country risk evaluation
– Keep financial information and capability/compensation information
– Keep all references and questionnaires
• Keeping Written Records is Key
– Lack of records invites closer look at your practices
Records provide proof that you conducted due diligence – without records, you have no proof.
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DOJ Guidance
Emphasis on pre-closing due diligence and post-closing integration of Target into Acquirer’s compliance and internal control programs.
• It is important to educate the diligence team on FCPA issues specifically
• You must factor in the necessary time for an effective FCPA review
• Follow up on identified red flags and risk areas
Document, document, document
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DOJ Guidance (cont.)
• Factors affecting the appropriate scope of review:
– Deal structure and size – what is material?
– Industry of the Target
– Location of operations
– Competition
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DOJ Guidance (cont.)
• DOJ has identified five specific areas that Buyers should inquire about with Targets:
– Interaction with foreign governments as customers
– Interaction with foreign governments at JV partners
– Government licenses and approvals required to operate abroad
– Requirements relating to customs in foreign countries
– Relationships with third-party representatives, including how those representatives are vetted
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DOJ Guidance – M&A/Due Diligence
• DOJ encourages companies in M&A to:
– Conduct thorough risk-based due diligence– Implement the acquiring company’s code of conduct
and anti-corruption policies as quickly as possible– Conduct FCPA training for the acquired entity’s
directors and employees, as well as TPIs– Conduct an FCPA audit of the acquired entity as
quickly as possible– Disclose to DOJ any corrupt payments discovered
during the due diligence process.
• This will factor into whether and how DOJ will seek to impose post-acquisition successor liability
FCPA Opinion Procedure Release 2014-02
Thank You
Elsa Manzanares(713) 276-5172
Marla Poirot (713) 276-5112
Michelle Schulz(713) 276-5181