Emerging Global Markets and Risk-Based Due Diligence

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Emerging Global Markets and Risk-Based Due Diligence Overcoming Hurdles, Avoiding Restrictions, and Ensuring Compliance When Doing Business in Restricted Environments TUESDAY, APRIL 26, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Eric R. McClafferty, Partner, Kelley Drye & Warren, Washington, D.C. Jay G. Martin, Vice President, Chief Compliance Officer and Senior Deputy General Counsel, Baker Hughes, Houston Daniel Patrick Wendt, Member, Miller & Chevalier, Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Conducting Due Diligence of Business Relationships in Emerging Global Markets PART I: HURDLES INVOLVED IN CONDUCTING DUE DILIGENCE IN RESTRICTED ENVIRONMENTS Daniel Patrick Wendt, Member Strafford Webinar April 26, 2016

6 Agenda: Part I Background Purposes of third party due diligence FCPA trends re: third parties Quick overview of due diligence best practices Hurdles for effective due diligence Local laws Business culture Recordkeeping Miller & Chevalier Chartered 6

7 Purposes of Third Party Due Diligence International compliance Effective compliance program (non-statutory) U.S. Attorney s Manual/U.S. Sentencing Guidelines Shareholder litigation Anti-Corruption/Foreign Corrupt Practices Act Sanctions and export controls Anti-money laundering Code of conduct Fraud and conflicts of interest Miller & Chevalier Chartered 7

8 Trends: Countries of Focus Countries Implicated Most Frequently in Corporate FCPA Enforcement Actions Note: Updated through March 29, This chart tracks each country implicated in the corporate FCPA dispositions brought by the SEC and DOJ. Where a matter involved more than one action brought against a particular company and its subsidiaries and affiliates, those actions are combined and counted as one. Miller & Chevalier Chartered 8

9 Enforcement Actions Involving Third Parties Combined Corporate Enforcement Actions Involving Third Parties* 1992 through ** * These statistics combine all related resolved enforcement actions involving each company and its subsidiaries and affiliates. ** numbers are estimated based of pace of enforcement through March 29, Miller & Chevalier Chartered 9

10 Trends: Focus on Non-Traditional Third Parties In recent years, the agencies have expanded their focus beyond traditional third party intermediaries (e.g., sales and customs agents, consultants, lobbyists): Channel partners/distributors (Hewlett Packard, Mead Johnson) Stevedoring company (ADM) Insurance company (ADM; J&J; IBM; and BAE) Simulation technology and power generation subcontractors (Data Systems) Unspecified "vendors" (Oracle; Pride) Driver (Paradigm) Landlord (Paradigm) Miller & Chevalier Chartered 10

11 Due Diligence Keys: Know Your Partners Due diligence Business rationale Qualifications Ownership Relationships with officials Reasonableness of compensation Tiers of due diligence Type of relationship Red flags arising from due diligence Limits of due diligence news regarding Unaoil Safeguards Contract terms Certifications Monitoring Miller & Chevalier Chartered 11

12 Local Laws Affecting Due Diligence General privacy laws Limiting the ability to pursue due diligence of entity ownership, affiliations, reputation, personal background China: Prosecution of ChinaWhys Types of private information: Residence addresses, family members, exitentry information, real estate ownership Limitations on corporate information U.S. registrations: Delaware, Oregon Offshore jurisdictions: BVI, Mauritius, Cyprus, etc. Panama Papers Registrations China: Many different corporate authorities Miller & Chevalier Chartered 12

13 Local Laws Affecting Due Diligence Data privacy Nature of legislation, regulations and enforcement varies Definition of personal data is often very broad Processing data (often any third party access) Cross-border transfers of data Cross-recognition among some regions United States isolation Negotiation of new US-EU Safe Harbor Standard Forms of consent vary depending on collection, use Miller & Chevalier Chartered 13

14 Local Laws Affecting Due Diligence National security/military secrets Depends on nature of industry and business partners (e.g., state-owned enterprises) Can often cloud business transparency, limit discussions and/or access to documents Can also increase risks of conducting market-based due diligence (sensitive topics, entities, ownership) Can often be used as a shield to hide improper dealings? Business justifications: Gov t Agency X has directed use of Entity Y Limited responses to questionnaires Opaque ownership, limited references Miller & Chevalier Chartered 14

15 Local Laws Affecting Due Diligence Local partner requirements Multinationals obligated to use national/local partner in various markets Pool of potential partners may be limited Can potentially limit the effectiveness of due diligence Miller & Chevalier Chartered 15

16 Business Culture Affecting Due Diligence Language Necessity to conduct due diligence using resources in all relevant languages Ownership/shareholders/offshore entities Business culture of using nominal shareholders? Often require extensive cooperation from target and/or extensive market intelligence in order to resolve issues Familial relationships Direct family Extended family Trusts/control agreements Miller & Chevalier Chartered 16

17 Business Culture Affecting Due Diligence Patronage/protection Unofficial links to government officials, other prominent locals Necessity to use third parties for business development Brazil: five years ago Brazil: post-operation Carwash Access to information in-country Limited press? Close-knit business communities? Monitoring of communications? Miller & Chevalier Chartered 17

18 Recordkeeping Concerns How to handle information gained during due diligence Retrieving data from high-risk markets Storing sensitive data (in-country vs. offsite) Communicating results back to high-risk markets? Considerations Local law concerns (data privacy, national security, etc.) Necessity for local personnel to know results How to handle local monitoring/investigations/raids Discussions of government officials? Discussions of private citizens with significant local influence? Information that may otherwise be sensitive? Miller & Chevalier Chartered 18

19 Due Diligence Hurdles in Emerging Markets Reducing Risk Eric McClafferty, Partner (202)

20 Overcoming Obstacles to Diligence in Emerging Markets As just discussed, many emerging markets present high levels of compliance risk FCPA, political risk, fraud, export control, national security concerns, data privacy, and more Combine this with difficulties in conducting due diligence in Emerging Markets Lack of available or easily searchable records Cultural issues, including local lack of experience/familiarity with diligence research This results in a high risk situation with less than adequate access to information needed to reduce that risk Moreover, timing is often very short, especially in the M+A context 20

21 What do you do in response to these challenges? You must work to identify areas of particular risk Red Flags 21

22 Identifying Red Flags -- Examples Unusual payment arrangements for provision of services, including excessive payment for limited services/access A recommendation by a government official to hire a particular third party Doing business in country with reputation for corruption Refusal by a business partner to agree to anticorruption provisions in agreements Evidence of, or requests for unusually high commissions Lack of transparency and other issues in accounting records Joint-venture partner third party that does not appear capable of performing the services offered 22

23 More Red Flags Lack of internal controls Lack of code of conduct, anti-corruption, anti-fraud, and other compliance program indicators (more common than you might think) Sales to or purchases from government or State Owned Enterprise (SOE) Charitable giving concerns Gift, travel, entertainment concerns Marketing expense issues 23

24 How do we spot red flags? Recognize the context and adapt the approach Acquisition diligence? Selecting a third party service provider? Evaluating a supplier? Analyzing potential Government or non-government customer? Different contexts require different approaches. In each context, take a systematic approach so that basic questions are asked and answered every time you undertake a similar review (recognizing that the process will improve over time) But build in flexibility to adapt to the situation additional questions and follow-up based on initial research and what is learned as the review progresses 24

25 Basic and advanced research techniques The Internet Databases many types (D+B, Hoovers, public records, news, legal filings) Transparency International TRACE and similar service providers U.S. Government Example U.S. Commercial Service 25

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30 Research techniques continued Questionnaires for your business personnel Questionnaires for the target Do business with the government? Connections to current or past government or political party personnel? Interviews Site visits Third party investigators (international and local) and local attorney resources. Retained by counsel if possible to protect privilege to extent it is available. Risks and benefits And other tools 30

31 Systematic, Reliable, Defensible Approach Again, recognizing that there is a continuum of risk, of available resources, and limits on time -- Perfection typically not obtainable When to devote maximum resources Are you in a heavily scrutinized industry? Lots of $ at stake? Dealing in a very corrupt environment? What is the minimum? Want to be sure you are getting the basic information each time Forms, checklists, questionnaires demonstrate the methodology and provide a record upon which decision was based. 31

32 Conducting Document Reviews and Interviews Selecting the team. Outside counsel? Forensic accountants? Language capability Again, recognize the context and identify roles. For example, Acquisition target? Cannot afford to antagonize senior members of the target company. But you need to obtain information. Review the documents before starting the interview, or interview early? On site file review? What are we looking for? How does the company do business? Sell to the government? How much, how often? Use third party intermediaries? How much, how often? How paid? 32

33 Document Review -- Examples Organizational Chart Names and positions of personnel responsible for compliance Code of Conduct and training on Code and compliance system Specific anticorruption, fraud, etc., policies, procedures Past experiences with corruption (previous investigations, violations, penalties). Past audit reports. Samples of contracts with third parties agents, distributors, customs brokers, forwarders, etc. Financial reports, including expense reimbursement data Hotline reports? s? 33

34 Interviews continued Who gets interviewed? Senior personnel and compliance personnel Who deals with government customers, SOE s? Who knows about payments, especially to third parties? How to interview? Elicitation through to interrogation. Get them talking about their business. No judgement. No explaining FCPA, or other legal provisions. Focus on the facts. Be ready to get at relevant information through several avenues. Compare and contrast answers. In person or on video? Watch body language and other clues, but recall cultural context. You may not be an expert. 34

35 Interview approaches, continued. Leave the door open to come back with more questions. Watch data privacy issues. Documenting the review process. 35

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37 Positive and negative factors that need to be considered in any evaluation of a third party being used in a high risk country Third Party Characteristics Positive Signs No Government Contacts Clear Ownership Commercial Capability Experience in the Region Commercial Directory Listings Past Positive Relationship Favorable Business References Based in Low-Risk Country Established Facilities Negative Signs Related to Government Official Government Official Referred Lacks Licenses or Registrations Lacks References Lacks Experience Primary Strength is Influence Incorporated in High-Risk Country Questionable Past 37

38 Positive and negative factors that need to be considered in any evaluation of a third party being used in a high risk country Third Party Requests Positive Signs Effort-based Compensation Concrete Deliverables On-budget, On-time Performance Interface with Qualified Staff Detailed Scope of Work Transparent Payment Process Accurate Documentation Negative Signs Refuses Corruption Contract Provisions Excessive Compensation Misleading Payment Structure Anonymity Success Fee Subcontracting to Third Party False Documents 38

39 Positive and negative factors that need to be considered in any evaluation of a third party being used in a high risk country Third Party Operations Positive Signs Performance Consistent with Proposals Accurate Documentation Anti-Corruption Program Well-Trained Employees Negative Signs Becomes Target of Investigation Unclear or Suspicious Documentation Requests Backdating or Fraudulent Documentation Refuses to Certify Compliance Connection with Government or Customer Emerges Suspicious Expenses or Travel 39

40 Positive and negative factors that need to be considered in any evaluation of a third party being used in a high risk country Third Party Payments & Invoices Positive Signs Commercially Reasonable Terms Regular Channels Matches Commercial Capability Reasonable Compensation Payment in Country Established Banks Negative Signs Third Countries or Parties Third-Country Banks Shell Companies Post Office Boxes Larger Payments During Government Interaction Success Fee Unexpected Bonuses or Loans Invoices Paid Too Quickly Requests Negotiable Currency 40

41 Thank You Eric R. McClafferty Kelley Drye & Warren Jay G. Martin Baker Hughes Daniel Patrick Wendt Miller & Chevalier