Day 13 of One Month to More Effective Compliance for Business Ventures

Numerous US companies have come to FCPA grief for their overseas joint ventures and the continue to be a bane for many companies under the Act. There are some basic compliance terms and conditions which should be considered for any foreign joint venture agreement to help US companies manage these compliance risks.

As a starting point, it is important to have compliance terms and conditions, these reasons can include some of the following: (1) to set expectations between the parties; (2) to demonstrate the seriousness of the issue to the non-US party; and (3) to provide a financial incentive to do business in compliant manner.

1. Prohibition of all forms of bribery and corruption. Many foreign joint venture partners may not understand that the FCPA applies to them if they partner in a business relationship with a US company. Further, they do not understand that they may be governmental officials under the FCPA. This all must be spelled out for them so you should have language regarding the following:

• Prohibition of all forms of bribery and corruption, but you should be careful to make note that FCPA is broader than simple bribery; it includes hospitality/gifts/entertainment/travel as well.
• Affirmation of FCPA compliance, this should be in writing and it should also require that the non-US party understand or have familiarity with the FCPA, as well as that they will comply with the tenets of the FCPA.
• Agreement to comply with local laws and customs regarding anti-bribery and anti-corruption in the jurisdiction where it is located and/or does business. 

2. Right to Cancel and Recoupment rights. These should include the following:

• Right to cancel the contract if there is a compliance violation or breach of contract because that allows you maximum flexibility.
• Withhold any payments due.
• Allow for disgorgement of any monies previously paid under the agreement.
• Take any other action you think necessary or appropriate. 

3. Duties

• Spell out exact duties and deliverables of the Joint Venture.
• Employees of the joint venture have continuing duty to adhere to training.
• There will be updated due diligence performed on the JV partner.
• There is an ongoing duty to report changes in ownership structure of any non-US partner. This includes changes in corporate structure and/or corporate leadership. There must be immediate notification to the US company and it is particularly important when government changes.
• Require that the joint venture follow generally accepted accounting principles (GAAP), and conduct an annual audit by an agreed upon independent accounting firm.
• Prohibit the creation of any funds without the approval of the joint venture’s governing body (supermajority approval in the case of minority interest by the multinational).
• If the foreign joint venture partner has day-to-day management responsibilities, require dual signatures for checks or electronic funds transfers drawn on joint venture bank accounts.
• Require that the joint venture conduct investigative due diligence on agents, consultants and other third parties retained by the joint venture.
• Require the implementation of a code of business conduct by the joint venture and implement an anonymous reporting mechanism for joint venture employees. 

4. Audit Rights – these are an important tool in your joint venture risk management process and must be included in any joint venture agreement. In addition to putting your JV partner on notice that you are not simply willing to look the other way once the agreement is signed, it is an active acknowledgement that there will be ongoing transactional review during the term of the joint venture agreement. If any illegal payments are made or discovered the US company should retain full access to the audit trail which it can then turn over to the proper authorities. Additionally, the joint venture should have the right to audit any agent(s) it may hire for its own use. 

If you have audit rights you must exercise them. The same calculus is true for termination rights. If you have a good faith belief that your JV-US partner has violated the FCPA, you better exercise your right to terminate. If you do not do so, your US company will probably be in more hot water with the DOJ. 

5. Prohibited Parties - the Joint Venture will not deal with US designated Prohibited Countries, Prohibited Parties or any other persons or entities on any such OFAC prohibited list.
6. Certifications-you should specify that the foreign partners will annually, personally, certificate that they have not violated the FCPA on any matters relating to the joint venture, are aware of no FCPA violations by the joint venture which they have not previously reported and have received and understood annual FCPA training.

Lastly one area which is continuing to be problematic is that of how to make payments. Some of the tools to manage this risk are the following:

• Always try to make payments via wire transfer.
• No large upfront payments unless designated for legitimate start-up expenses.
• Pay only to the named company, not unknown third parties.
• Payment in local currency, however you can pay in USD. The key is consistency in how you are paying and your documentation.
• Pay where the agent’s country of residence or where the work is done.

All the above steps should be taken only after extensive due diligence has been completed. After the contract is signed your company will have to work just as hard to keep the compliance program for any joint venture robust and meaningful. However, with these terms and conditions in place, you will have a chance to maintain your FCPA obligations and to manage the risk that is involved when working jointly with non-US companies.

Three Key Takeaways

1. Failure to secure appropriate compliance terms and conditions in a JV agreement can cause great FCPA risk for a US company.
2. Certifications are important requirements to obtain.
3. Audit rights must be secured and equally importantly, exercised.

This month’s podcast series is sponsored by Michael Volkov and The Volkov Law Group.  The Volkov Law Group is a premier law firm specializing in corporate ethics and compliance, internal investigations and white collar defense.  For more information and to discuss practical solutions to compliance and enforcement issues, email Michael Volkov at [e-mail] or check out www.volkovlaw.com.