Buying an FCPA Violation: The Danger of Successor Liability
Do Not Be Penny Wise or Pound Foolish
In-house counsel seeking to minimize their company's risk of liability under the Foreign Corrupt Practices Act ("FCPA") should pay careful attention to the potential exposure created by merger and acquisition activity. As a number of recent cases have shown, unwary companies can "purchase" FCPA liability by failing to conduct appropriate due diligence of their intended transaction target. On the other hand, companies alert to those risks have been able to avoid successor liability altogether or, more frequently, to obtain assurances from the Department of Justice through the Opinion Procedure. Advance planning allows the company to understand and effectively price into the deal the scope of potential FCPA liability before closing the transaction, and allows the acquirer to plan the timing for integrating the target company into the acquirer's anti-corruption compliance program. This QuickCounsel reviews the FCPA liability risk involved in mergers and acquisitions and discusses strategies in-house counsel can use to avoid that risk.
The purpose of the FCPA is to prohibit the payment of bribes to foreign officials for the purpose of obtaining or retaining business. The FCPA consists of a prohibition on "bribery" of foreign officials and a requirement that companies keep accurate books and records and maintain a reasonable system of internal controls.
The anti-bribery provision prohibits a "person" from making an offer, payment, promise, or authorization to pay any money or thing of value to any foreign official, with the intent to:
The accounting provisions require companies to keep accurate books and records, and maintain an adequate system of internal accounting and financial controls with proper authorization. As a result, a company's books and records must reflect any payments, bribes, or facilitation payments in its accounting books to allow preparation of financial statements that conform to generally accepted accounting principles.
The FCPA applies to "issuers" and "domestic concerns," and any individual, officer, director, employee, or agent of any issuer or domestic concern. The FCPA has broad extra-territorial reach and can impose criminal liability for violations by parties located outside the United States. Foreign companies or persons are subject to prosecution under the FCPA if they act, directly or through agents, to further the corrupt payment while in the United States, or if they use any instrumentalities of interstate commerce of the United States.
Corporations face criminal penalties up to $2 million for each violation of the anti-bribery prohibitions and criminal fines of up to $25 million for violation of the accounting provisions. For anti-bribery violations, individuals are subject to up to five years in prison and up to $250,000 in fines. Individuals can face civil penalties up to $10,000. For accounting violations, criminal penalties for individuals can reach $5 million and 20 years imprisonment for each offense.
The FCPA also proscribes payments made through third parties (e.g. agents, consultants, distributors), including joint venture partners, with "knowledge" that a portion or all of the payments will be made, directly or indirectly, to a foreign official. It is not necessary to have actual knowledge that a payment will be made to a person by a third party. Deliberate ignorance or conscious disregard of the facts can also constitute knowledge of a payment.
Companies may be held liable for civil and criminal violations of the FCPA committed by the target company even if those acts occurred prior to the acquisition or merger and were entirely unknown to the acquiring company. A company may mitigate its risk by conducting due diligence prior to an acquisition or merger (or, in some cases, immediately following an acquisition or merger). Due diligence does not eliminate an acquiring company's liability. Once a company identifies potential FCPA violations, the acquiring and target companies may voluntarily disclose FCPA violations to the Justice Department and the SEC to allow for the opportunity to resolve any such potential liabilities.
The impact of FCPA liability in the mergers and acquisitions context is wide-ranging. FCPA violations may impact the transaction price, deal structure and require specific warranties and indemnifications in the purchase agreement. Additionally, the discovery of FCPA violations may cause delay or even termination of a proposed deal, and create specific integration challenges when a deal is completed.
The DOJ and SEC adopted the concept of "successor liability" starting in 2003. The government has continually reiterated that companies can escape criminal FCPA liability by conducting rigorous pre-closing due diligence and disclosing any violations discovered prior to closing the deal.
Recent enforcement actions involving FCPA issues identified during pre-acquisition due diligence drive home the need for effective pre-closing due diligence. For example, Snamprogetti, a subsidiary of ENI, engaged in a bribery scheme for 10 years, which ended in 2004. In 2006, ENI sold Snamprogetti to another company, Saipem. Four years after the acquisition closed, in 2010 Snamprogettiincurred FCPA criminal violations and agreed to pay a $240 million fine (Both its previous and current shareholders, ENI and Saipem, were jointly liable for the fine).
In 2005, Dimon Inc. and Standard Commercial Corporation merged to form Alliance One. Five years later, DOJ brought a criminal case against Alliance One for FCPA violations committed by foreign subsidiaries of Dimon and SCC which had occurred before the merger. The foreign subsidiaries entered guilty pleas and Alliance One cooperated and, under the terms of the guilty plea, was required to retain an independent compliance monitor for three years.
The scope and depth of an FCPA pre-acquisition due diligence must include an assessment of bribery, books and records, and internal controls risks. The nature and extent of the inquiry will depend on factors such as the nature and location of the company's business. For example, a business model that involves frequent interaction with government regulators or government customers may require more scrutiny than one that does not. In addition, the nature of the business may require scrutiny of specific areas, including, inter alia, political contributions, lobbying activities, and payments to customs agents.
There is limited legal authority regarding the scope of due diligence required for transactions – it is "an art, not a science." In fact, due diligence is not a legal defense, but only minimizes the risk of successor liability when coupled with the acquiring company's demonstrated commitment to FCPA compliance as shown through an active and vigorous compliance regime. The FCPA due diligence inquiry is ultimately a risk-based assessment:
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