White Collar Defense and Investigations
Action Item: In November 2014, the United States Department of Justice issued an Attorney General Opinion with respect to the enforcement of the Foreign Corrupt Practices Act. This Opinion underscored the need for U.S. companies seeking to acquire foreign entities to conduct comprehensive due diligence in order to protect them from potential FCPA liability post-acquisition. The Opinion further emphasized that the acquiring company needs to undertake comprehensive diligence before the acquisition’s closing to ensure that the target company is fully compliant with the requirements of the FCPA. By conducting comprehensive due diligence and implementing specific remediation steps in cases where misconduct has been identified, the acquiring company will minimize its potential exposure to future FCPA enforcement actions.
In November 2014, the United States Department of Justice (“DOJ”) issued an opinion of the Attorney General (the “Opinion”) with respect to the enforcement of the Foreign Corrupt Practices Act (“FCPA”). The request for the Opinion arose out of due diligence that an issuer of securities in the United States, a multinational public consumer products company (the “Requestor”), conducted in advance of a planned acquisition of a foreign consumer products company (the “Target Company”). Specifically, in the course of its due diligence, the Requestor identified a number of improper payments by the Target Company to foreign government officials without any jurisdictional nexus to the United States, as well as substantial weaknesses in the Target Company’s accounting and recordkeeping.
The Requestor inquired to the DOJ whether the agency would bring an FCPA enforcement action against it based upon the Target Company’s pre-acquisition conduct. The DOJ’s response to the Requestor highlighted the need for U.S. companies seeking to acquire foreign targets to conduct comprehensive due diligence prior to acquisition, and, if they identify conduct that runs afoul of anti-bribery laws and regulations, to then undertake appropriate remediation efforts in advance of the acquisition’s closing. These actions will enable companies to avoid liability for potential FCPA violations.
Due Diligence Conducted by the Requestor
In preparing for the acquisition, the Requestor conducted due diligence into potential legal or compliance issues associated with the Target Company. The Requestor accomplished this in part by retaining a forensic accounting firm to conduct a review. After compiling a risk profile of the Target Company, the accounting firm reviewed approximately 1,300 transactions involving the Target Company, with a total value of nearly $13 million. The accounting firm subsequently identified more than $100,000 in transactions that involved payments directed to government officials to facilitate the obtaining of permits and licenses, as well as gifts, charitable contributions, and cash donations to government officials and to members of the state-controlled media to minimize negative publicity.
Through its due diligence, the accounting firm further determined that the improper payments and gifts to government officials were not supported by the Target Company’s documentary records. The accounting firm noted that expenses were improperly classified in the Target Company’s books, that many accounting records simply could not be located due to disorganization, and that the Target Company had not developed or implemented a written code of conduct or other compliance policies and procedures to prevent employees from violating anti-bribery laws.
Remediation in Advance of Closing the Acquisition
Based on its due diligence, the Requestor prepared an integration schedule that it provided to the DOJ enumerating steps to remediate the compliance concerns that had been identified. Specifically, the Requestor set forth practices it would implement to mitigate risk and further explained how it would conduct training with regard to compliance procedures and policies, standardize business relationships with third parties, and formalize the Target Company’s accounting and recordkeeping in accordance with the Requestor’s policies and applicable law.
The DOJ’s Opinion first addressed whether an enforcement action would be appropriate against the Requestor based upon the Target Company’s pre-acquisition conduct. With respect to this issue, the Opinion noted that a basic principle of corporate law is that a company assumes certain liabilities when merging with or acquiring another company, including pre-existing criminal and civil liabilities. Nevertheless, successor liability does not “create liability where none existed before.” Accordingly, the DOJ stated that it would not initiate an enforcement action against an issuer seeking to acquire a foreign company that was not previously subject to the FCPA’s jurisdiction based upon the mere acquisition of this company. The DOJ qualified this statement, however, by explaining that an enforcement action might be appropriate where contracts or other assets that were determined to have been acquired through bribery remain in operation following the acquisition (the Requestor had established that such was not the case for the acquisition of the Target Company).
The Opinion then addressed the adequacy of the Requestor’s integration schedule. On this question, the Opinion declined to express a view, explaining that the circumstances of each corporate merger vary and that it would be impossible for the agency to comment on the exact timeline and appropriateness of one company’s integration schedule. Nevertheless, the Opinion emphasized that companies engaging in mergers and acquisitions are well-served to do the following : (1) conduct thorough risk-based FCPA and anti-corruption due diligence; (2) implement the acquiring company’s code of conduct and anti-corruption policies as quickly as practicable; (3) conduct FCPA and other relevant training for the acquired entity’s directors and employees, as well as third-party agents and partners; (4) conduct an FCPA-specific audit of the acquired entity as quickly as practicable; and (5) disclose to the DOJ any corrupt payments discovered during the due diligence process. The Opinion concluded that a company’s conformity with these elements would be a driving factor in determining whether and how the DOJ would seek to impose liability on the company in case of a putative violation post-acquisition.
The Opinion’s analysis of the Requestor’s efforts to ensure FCPA compliance in pursuing a foreign acquisition offers a palpable reminder to U.S. companies seeking to acquire foreign entities that comprehensive due diligence is critical to protecting the company from potential FCPA liability post-acquisition. Moreover, if improper conduct that runs afoul of anti-bribery laws and regulations is identified, it is incumbent upon the acquiring company to undertake detailed and appropriate remediation efforts in advance of the acquisition’s closing. In so doing, the company will ensure that the target entity is compliant with the acquiring company’s FCPA compliance policies and code of conduct, and will further minimize the acquiring company’s exposure to future FCPA enforcement actions.