Expansion into both new and emerging markets is a continuing trend for companies across many industry sectors. In a number of jurisdictions, local law restricts foreign companies from establishing wholly owned subsidiaries - this is particularly true in regulated industries such as mining, banking, pharmaceuticals or telecommunications. Establishing a joint venture (“JV”) with a local partner is therefore a common form of entry into the market. Even if local law allows for free entry into the market, JVs can still be an attractive strategic or economic option in terms of drawing upon local expertise, skills and contacts and sharing risks, costs and resources.
Whilst the attraction of JVs is clear, their creation and ongoing operation can present a number of issues for in-house legal teams and compliance officers. It is critical to manage the regulatory and reputational risks that can arise from operating a JV with a sanctioned partner (or a partner that becomes sanctioned), or with a JV partner who engages in corrupt practices.
Joint Ventures – What Are The Risks?
Conducting business through a JV – whether your partner is known to you or not – is widely recognised as a “higher risk” business relationship in the context of sanctions and corruption risk. Similar “higher risk” arrangements would include using agents, distributors or other intermediaries.
In many jurisdictions, a company will often either have no choice as to its partner, or there will be a limited number of realistic candidates. Prospective partners may be government bodies or state owned enterprises and/or the partner or their representatives may have connections to their country’s government or public officials – be it that they are ministers or ex ministers, they have personal or family ties to members of the government or influential figures.
Sanctions restrictions are often targeted at governments and those entities and individuals who are close to them, including state owned companies. UK sanctions legislation varies in relation to the country or regime that it applies to, but will contain provisions making it a criminal offence to provide funds or economic resources to a sanctioned person or entity (although receiving funds is not generally a problem or subject to licencing arrangements). It will also be an offence to “deal” with the funds (which will include shares, debt obligations and dividends) and economic resources of a sanctioned person or entity or an entity owned or controlled by a sanctioned person or entity. Any attempt to circumvent a prohibition in the legislation or enable or facilitate the commission of an offence will also amount to a criminal offence.
The Bribery Act, which came into force in the UK in 2011, created a number of new bribery offences which have been widely considered and discussion of which is beyond the scope of this article. However, what should be at the forefront of the mind of any in house counsel or compliance officer whose company operates in JVs is the offence in section 7 of the Bribery Act. Section 7 creates a strict liability offence for commercial organisations that fail to prevent bribery by those acting on their behalf (termed in the Bribery Act as their “associated persons”), where the bribery was intended to obtain or retain a business advantage for the commercial organisation. To be guilty of an offence under section 7, an organisation does not need to be aware of the corrupt conduct, and will only have a defence if it can demonstrate that it had in place "adequate procedures" to prevent bribery. The term "associated person" is widely defined by the Act, but may include JV partners where the partners perform services for or on behalf of one another – this would depend on the particular circumstances and operation of each JV.
It also should be noted that any company that has operations in the US, is listed on a US stock exchange or has US persons employed, particularly in its senior management will also need to consider US sanctions and anti corruption legislation. The U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC) have been seen to be particularly aggressive in investigating and prosecuting both companies and individuals in relation to both sanctions and corruption offences.
What You Should Be Doing
Identifying potential sanctions and corruption risks in connection with a JV should start with considering the risk profile of the proposed JV and JV partner and the ongoing commercial activities of the JV.
Considering the following factors should help you to begin to assess the level of risk attaching to the JV and identify how they would be best managed:
Whether the proposed JV and/or your JV partner will operate in jurisdictions subject to EU, UN, UK or US sanctions.
Whether the JV will conduct activities which are prohibited under the various EU, UN, UK or US sanctions regimes.
Whether the proposed JV partner has links to wider sanctioned parties through its ownership or control structure.
Whether there is a risk that profits, dividends or loans will directly or indirectly benefit a sanctioned party.
Whether the proposed JV and/or your JV partner will operate in jurisdictions where corruption is perceived to be high . However, just because a country does not rank among the highest in terms of corruption risk, companies need to be cognisant of the risks associated with cultural practices or norms that may trigger liability under the Bribery Act.
The industry in which the JV operates - some sectors industries, such as the oil, gas, mining and construction industries, are generally considered to be higher risk industries for corruption. Equally some sectors such as the oil and gas and telecommunications sectors are specifically targeted by sanctions.
Whether the commercial activities of the JV will include interaction with, securing approvals or licences from or entering into contracts with the government, public officials or public sector bodies and therefore have a higher risk of associated corrupt activities.
Joint Venture’s – Managing The Risks
Risk management in relation to the creation and operation of JVs can usefully have three areas of focus:
Appropriate due diligence on the JV partner before entering into the JV agreement.
Adequate contractual protections within the JV agreement, including provisions for termination or suspension.
Monitoring and auditing the ongoing commercial operations of the JV.
JVs can be a necessary and highly effective way to engage in lucrative commercial operations. A considered, proportionate and risk based approach to the creation and operations of a JV should give companies the comfort they are looking for.