This alert, the fifth in our series addressing the Resource Guide to the U.S. Foreign Corrupt Practices Act (available here) that was jointly released by the Department of Justice ("DOJ") and Securities and Exchange Commission ("SEC") on November 14, 2012, provides: (1) a summary of DOJ and SEC's enforcement positions with respect to successor and joint venture liability; (2) recommended pre-acquisition due diligence steps; and (3) recommended post-acquisition integration steps.
Prior Issues in this Series
Issue 1 - Top DOJ Official Elaborates on New FCPA Resource Guide
Issue 2 - Elements of Compliance Programs
Issue 3 - Relationships with Third Parties
Issue 4 - Gifts, Hospitality and Entertainment
Successor and JV Liability
As with other aspects of FCPA enforcement, the Resource Guide re-affirms DOJ and SEC's position that acquirers can be held liable for FCPA violations committed by their targets: "[s]uccessor liability applies to all kinds of civil and criminal liabilities, and FCPA violations are no exception."
Consistent with the emphasis on voluntary disclosure which permeates the Resource Guide, DOJ and SEC point to the potential for declinations (and other alternatives to guilty pleas) when an acquirer voluntarily discloses past violations by the predecessor company, remediates the conduct, and cooperates with enforcers. In the acquisition context, however, DOJ and SEC also emphasize that they frequently pursue enforcement actions against only the predecessor company - rather than the acquiring company - thus enabling the acquiring company to avoid potential debarment and other negative repercussions associated with a guilty plea. This is often cold comfort to a company whose new acquisition is devalued by a corporate criminal conviction.
The Resource Guide also reiterates that an issuer can be held responsible for accounting violations of its joint venture partners. Specifically, an issuer can be held directly liable for the "fail[ure] to have adequate internal controls and fail[ure] to act on red flags indicating that its affiliates were engaged in bribery." As reflected in the text of the FCPA, however, if a company owns less than 50% of a subsidiary or affiliate, the company is required only to use its "best efforts" to implement adequate internal controls.
Pre-Acquisition Action Items
Given the high costs of an FCPA enforcement action (including investigation, defense, and collateral litigation costs) and the devaluation that often follows an enforcement action, the Resource Guide stresses the importance of pre-acquisition anti-corruption due diligence. Not only can such due diligence prevent the company from buying a corrupt business, the Resource Guide suggests that good faith due diligence efforts can help prevent a criminal prosecution in the event that due diligence fails to catch an existing problem.
Though the Resource Guide does not mandate particular due diligence steps, a company negotiating the acquisition of a foreign target should consider the following action items:
- Determine the extent of the target's international operations, including agents, distributors, and sourcing;
- Have the company's legal, accounting, and compliance departments review the target's sales and financial data, its customer contracts, and its third-party and distributor agreements;
- Perform a risk-based analysis of the target's customer base;
- Perform an audit of selected transactions engaged in by the target;
- Engage in discussions with the target's general counsel, vice president of sales, and head of internal audit regarding all corruption risks, compliance efforts, and any other major corruption-related issues that have surfaced at the target over the past 10 years; and
- Seek, in particularly difficult cases, an opinion release from DOJ (which SEC also honors).
Post-Acquisition Integration Action Items
The Resource Guide also emphasizes the importance of swiftly integrating an acquired company into the parent's compliance program and remediating any problems that were not discovered until after the acquisition has closed.
In particular, DOJ and SEC encourage companies to take the following steps after acquisitions:
- Ensure that the acquiring company's code of conduct and anti-corruption compliance policies and procedures apply as quickly as is practicable to newly acquired businesses or merged entities;
- Provide anti-corruption training to the directors, officers, and employees of newly acquired businesses or merged entities (and to agents and business partners, when appropriate);
- Conduct an FCPA-specific audit of all newly acquired or merged businesses as quickly as practicable; and
- Disclose any corrupt payments discovered as part of its due diligence.
These steps may decrease the likelihood of an enforcement action even "when pre-acquisition due diligence is not possible."
Next in the Series
In our final installment of this series, we will address confidential reporting and responding to red flags and reports, including through internal investigations.