September 22, 2020

Volume X, Number 266

September 22, 2020

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September 21, 2020

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Corruption and the Closing Table: How Much Diligence is Due?

It is 2016 (almost). We all have heard about corruption – outrageous tales of money changing hands to enable access to new markets in under-regulated parts of the world, or payments for access to foreign ports, expediting the customs process. Perhaps the “ask” is more subtle, such as a large donation to the favorite charitable organization of a high-ranking government official in a faraway (but much coveted) market. In your own company, these practices – once, possibly, business as usual – are now prohibited by an anti-corruption compliance program and, more importantly, the law.

But, what is the state of compliance within the company that your company is looking to acquire? Are you considering the Foreign Corrupt Practices Act (FCPA) during due diligence? Are you investigating the relationships and business dealings of the target company as if they were your own? How much diligence is due?

The answers to these questions are fact-dependent. But, they are critical. The government will hold your company (and, potentially, you personally) accountable for the conduct of the company you are acquiring. Consequently, as the due diligence checklists are being drafted, minimally consider whether the target company has operations abroad. If it does, then consider asking a host of other questions.

Overview of the FCPA

The FCPA prohibits providing, offering, or promising anything of value directly or indirectly to a foreign official to obtain or retain business or to gain an improper advantage. The term “foreign official” has been construed very broadly to include, among other people, all government officials and employees at state-owned or controlled entities. Similarly, the use of the term “value” in the FCPA is also construed in an extraordinarily broad way. Value can be direct, as in the case of the payments mentioned above. Value can also be indirect, as in the case of donations to a government official’s favorite charity. Or, in many more recent examples, payments can occur through a complicated web of third-party agents, consultants, or other intermediaries. Irrespective of how the payment occurs, companies cannot accomplish indirectly that which they are prohibited from doing directly.

Regulatory Guidance for Due Diligence

Almost three years ago, the Department of Justice and the Securities and Exchange Commission jointly published their Resource Guide to the FCPA. In the Guide, the government commented: “A company that does not perform adequate FCPA due diligence prior to a merger or acquisition may face both legal and business risks. Whereas, in contrast, a company that identified FCPA issues as a part of the due diligence process and remediates those problems immediately after closing, among other actions by the surviving entity, may be rewarded by the government for its conduct.”

Ultimately, the enforcement environment has fortified the government’s statements in its Resource Guide. The lessons learned from these cases and the government’s guidance is that the time for identifying potential compliance risks begins with transactional due diligence.

Do Your Homework Today to Avoid FCPA Headaches Tomorrow

If the target company has operations abroad, FCPA due diligence is essential. Regulatory risk affects the value of the asset being purchased. And, equally important, the government has stated unequivocally (in the Resource Guide and through enforcement actions) that it will not hesitate to assess penalties against the surviving/purchasing entity if FCPA risks could have been identified during the due diligence process.

To mitigate that risk, consider these three initial due diligence questions:

  1. Does the target company do business in one or more countries recognized as being even moderately at risk for corruption?

  2. How does the target company’s business intersect (if at all), directly or through third parties, with the foreign government, foreign government officials (under the broad definition of the term), or state-owned enterprises?

  3. Does the target company have contracts (written or otherwise) with “finders,” “agents,” “consultants,” or other conduits to make introductions or otherwise to produce results abroad?

These questions represent the mere beginning of the necessary inquiry. But, based on the answers to these questions, experienced FCPA counsel can advise you about whether it is necessary to ask additional follow-up questions to drill down the scope and depth of your corruption risk.

And, in those instances where pre-acquisition due diligence simply is not feasible, the government has stated that it expects the surviving entity to conduct that due diligence immediately after the transaction closes. Simply put, these questions need to be asked.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume V, Number 328


About this Author

Noam Fischman, commercial litigation attorney, polsinelli law firm

Noam Fischman serves as a trusted guide leading clients through commercial litigation matters in federal and state courts, as well as government investigations and matters involving regulatory agencies. Noam has extensive experience advising clients about risk management and risk mitigation efforts in highly regulated industries, including health care, the EB-5 foreign investor program, telecommunications, non-profit organizations, and higher education.

Within these fields, Noam regularly represents clients in complex litigation and...

R. Montgomery Donaldson, business counseling, litigation attorney, Polsinelli law firm

R. Montgomery ("Monty") Donaldson, a seasoned veteran who has litigated and provided consultation in connection with a wide range of matters across an equally wide spectrum of industries, believes that the representation he provides, whether in court or in the boardroom, must stand on real ground and be tailored to clients' specific business objectives.

Monty's practice focuses on business counseling and litigation, with an emphasis on matters involving complex business transactions, corporate governance, securities, and special proceedings under the Delaware General Corporation Law and alternative entity laws.  Monty’s litigation practice also involves a diverse array of commercial matters, including commercial contract, consumer, and non-compete cases venued in the District Court for the Federal District of Delaware, the Delaware Court of Chancery and the Delaware Superior Court. In these and other matters, Monty routinely is called upon to serve as primary counsel or as Delaware counsel in coordination with reputable firms located throughout the country and abroad.