As more companies, including private equity (PE) firms, enter into cross-border transactions, the 35-year old Foreign Corrupt Practices Act of 1977 (FCPA) becomes a concern to a large population. The purpose of the FCPA is to prevent bribery of foreign government officials to obtain or retain business, and to promote accurate and transparent financial reporting by public companies. However, those at greatest risk today of the SEC and DOJ's enforcement of the FCPA may very well be "deep-pocketed" PE firms.
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Beware - Foreign Investment Risks
The FCPA's broad reach covers, among others, any entity with a principal place of business in the U.S., including U.S.-based private equity firms operating or with investments overseas. The definition of "bribe" under the FCPA also is broad,including anything of value - money, gifts, entertainment, hospitality, travel, or expenses - given or offered to a foreign official to get business or advance a commercial interest. This leaves a lot open for interpretation.
- If an overseas partner of a PE firm or its agents violates the FCPA, the PE firm may be liable;
- A PE firm's passive ownership position does not necessarily shield it from FCPA liability;
- PE firms can bear successor liability for the corrupt act of partners prior to investment; and
- There exists FCPA liability for prosecution, even where the PE firm lacks knowledge of a violation.
What can PE firms do to protect themselves? When investing overseas, it is imperative that PE firms conduct thorough pre-investment due diligence and maintain strong post-investment governance practices. In addition to scrutinizing operations, financial reporting, credit quality and key performance indicators, McDermott Will & Emery recommends being attuned to the following red flags with respect to the FCPA:
- Refusal to cooperate with due diligence requests, provide documentation or certify compliance with anti-bribery laws;
- Sales to government-run or owned entities, or need for government licensing or registration of products and to import products;
- No, or lax, anti-corruption/bribery policies and/or procedures;
- Resistance or concern about compliance or due diligence protocols, particularly with respect to the FCPA;
- Refusal or reluctance to explain aspects of operations, particularly concerning the use of consultants, 3rd-party intermediaries or agents;
- Lack of written contracts with 3rd-party agents;
- Poorly documented, undocumented or disproportionately large invoices for fees/expenses;
- Unusual payments (cash, cross-border, entity other than provider);
- Unusually generous or frequent gifts or lavish hospitality or travel arrangements; and
- Specific instructions from a foreign official regarding the hiring of consultants/agents/relatives/friends.
If you suspect clandestine behavior at a current or prospective portfolio company, it is imperative that you start your own investigation. Perhaps you will find out your suspicions are unwarranted, which would be good news. But, perhaps you will catch a rat before the company becomes mired down by an extensive DOJ/SEC investigation.
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About McDermott Will & Emery
McDermott Will & Emery is a premier international law firm with a diversified business practice. Numbering more than 1,000 lawyers, McDermott has offices in Boston, Brussels, Chicago, Düsseldorf, Houston, London, Los Angeles, Miami, Milan, Munich, New York, Orange County, Paris, Rome, Silicon Valley and Washington, D.C. Extending our reach to Asia, we have a strategic alliance with MWE China Law Offices in Shanghai and have announced plans to open an office in Seoul, Korea in the Spring of 2012.
For more information about the FCPA, please visit our website and the following articles:
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About Brandlin & Associates
Brandlin & Associates is an exclusive provider of accounting due diligence, financial consulting and strategic consulting services. We pride ourselves on offering superior technical expertise, years of practical experience and unparalleled service to decipher financial and operational performance metrics. As a result, our clients are able to make informed decisions in a timely manner.
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Events
New Law From the Madoff Case and Tips to Avoid the Next Ponzi Scheme
March 26, 2012
12:00 - 1:30 pm
Lawry's Restaurant
100 N. La Cienega Blvd.
Speakers:
Jeff Brandlin, Brandlin & Associates
Kathy Bazoian Phelps, Esq., Danning, Gill, Diamond & Kollitz
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Trends in the Debt & Equity Markets
April 4, 2012
4:00 - 7:00 pm
Jonathan Club
545 S. Figueroa Street
Los Angeles
We are pleased to be a Platinum Sponsor of the Commercial Finance Conference of California, the trade group for commercial finance companies, factors, banks and other financing agencies engaged in the asset-based financial services industry
of California.
>> Register here
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