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Staying aboveboard overseas.

The line between an ordinary overseas business deal and a violation of the Foreign Corrupt Practices Act is getting fuzzier all the time. Learn how to protect your company and yourself.

Several years ago, Lockheed hired a consultant and promised her a sizeable commission for each plane sold to the Egyptian government. The consultant was later elected to the Egyptian Parliament, becoming - under the U.S. Foreign Corrupt Practices Act - a foreign government official. Before taking office, she turned over the consulting responsibilities to a company her husband headed. Two years later, Lockheed sold three C-130 transport aircraft to the Egyptian government, and Lockheed allegedly paid the local consulting company a termination fee in lieu of the commissions, keeping the payment confidential through code names and other means.

A federal grand jury in Georgia subsequently indicted Lockheed and two of its officers for conspiracy to violate the Foreign Corrupt Practices Act, even though there was no factual allegation that the parliament member had taken a single step to misuse her official position on Lockheed's behalf. The prosecutors successfully argued that it was Lockheed's intent, not the recipient's actions, that mattered, and that one indication of corrupt intent was the secrecy surrounding the commission payment.

Lockheed pleaded guilty to a negotiated single count and agreed to pay the maximum fine of $24.8 million. The Lockheed executives pleaded guilty to false information charges or bribery charges and were fined $20,000 and $125,000, respectively, and sentenced to three years' probation in one case and 18 months in prison in the other.

As a financial executive, you should be aware that the U.S. government is stepping up its enforcement of the FCPA. While prosecutions under the FCPA historically have been cases of U.S. companies committing egregious bribery, aggressive prosecutors recently brought the Lockheed indictment based on much less clear-cut behavior. If that case is any indicator, all a prosecutor has to demonstrate is that a U.S. company or its agents intended to obtain business by paying a foreign official - regardless of whether the effort succeeded, and even regardless of whether it had a chance of succeeding.

Congress enacted the FCPA in 1977, in response to reports that U.S. companies were making questionable overseas political payments. The FCPA covers accounting rules and bribery, but the focus here is on the anti-bribery provisions. The companies that fall under FCPA regulation include all entities organized or headquartered in the United States, as well as most foreign companies that register securities for sale in the United States under the Securities Exchange Act of 1934.

In order to be found guilty of violating the FCPA, a regulated company, including its directors, officers, employees or agents, must have used U.S. interstate commerce corruptly in furtherance of an offer or promise to give "anything of value," with the intention of influencing a foreign government official or party candidate or officer to help the company obtain or retain business for itself or someone else. The offer or payment doesn't have to be in cash, and the disquietingly broad term "anything of value" could mean many things. In the case of foreign investments, for example, it could cover overpayment for an official's shares in an enterprise, or a high director's fee paid to an officer of a state enterprise that's a co-venturer with the company. Giving a special class of stock with unusually large dividends or favorable liquidation rights to a foreign official who is an equity investor could also be questioned.

Even travel and expense reimbursements can be suspect unless they clearly qualify as reasonable. However, the FCPA has been interpreted as permitting token gifts to foreign officials, provided the gifts are reasonable and are permitted under local law, as documented by an opinion of local counsel. "Facilitating" payments to officials is also permitted if the purpose is to expedite "routine governmental action," such as obtaining standard permits, visas, electricity, phone service or mail delivery - but not to get any new business.

Violations of the act can carry severe criminal penalties. For firms, statutory penalties are up to $2 million per count; for individuals, penalties are up to $100,000 or five years in prison, or both. And, since federal sentencing guidelines permit fines of double the defendant's pecuniary gain from the offense, the actual fines may be far higher.

There is some indication that investigations and enforcement activities may be increasing. News reports in late 1995 indicated federal grand juries in Texas and California were investigating Lockheed Martin Corp. for possible FCPA violations. And officials in both the United States and Argentina are reportedly looking into allegations of bribery involving IBM's subsidiary in Argentina.

KEEPING A PAPER TRAIL

What can your company do to avoid similar problems? While there may be many possible defenses to an action like the one in the Lockheed case, your best bet is to avoid conduct that will attract the interest of federal investigators in the first place. Let's consider a few examples of investments in companies in which officials of foreign governments or foreign political parties have interests.

Suppose your company is acquiring all or part of a foreign firm from a government official in that country. If your company pays a premium price to the official, it runs the risk that its actions might be regarded as impermissible under the FCPA, assuming other elements of the offense are also present. Therefore, you should carefully document the valuation method you choose for compensating the person and the rationale for the price. If possible, get an opinion from an outside source that the price is fair.

Similarly, if a foreign government or party official participates directly in your company's overseas joint venture as an officer, investor, director, agent or consultant, or participates indirectly through an intermediary, be careful to avoid promises or transfers of money, stock or other "value" until you have fully analyzed whether the promise or transfer might run afoul of the act.

If the foreign official will actively participate in the business in the future, articulate and document the business reason for retaining the official, whether as an investor or as an officer, employee or consultant. His or her business experience should be important to the overseas company's business purposes, and the compensation should match the person's expertise or contribution of equity or time. If possible, retain an outside firm to prepare a "comparables" report citing examples of individuals who have been paid the same sum for the same work in the host country.

As a general rule, if your firm will control a foreign company, ask the directors, officers, employees and agents of the company to acknowledge in writing that they're familiar with the FCPA and will not take actions that would cause you to violate its provisions. If the business partners are foreign officials, make sure they distance their government positions from their business ones. Among other things, these officials should agree to recuse themselves from government decisions on matters affecting the company. They also should promise to notify you if their government or political duties change to give them responsibility for decisions affecting the company or venture.

DON'T STICK YOUR HEAD IN THE SAND

Whether your company has a controlling or a minority interest in a foreign company, you may, in the view of the Justice Department, have imputed liability if you authorize, direct or participate in an impermissible activity of that company. What "participates" means is not exactly clear, although it obviously suggests some active involvement in the company instead of a passive investment. But we can draw some general conclusions about how companies should conduct themselves in the areas of due diligence, compliance and disclosure.

Your firm can have imputed liability for the foreign company's acts if it knows about them, and it can't take a "head in the sand" approach to avoid such knowledge. Therefore, learn what you can about the foreign company's reputation for honesty and legal compliance before you invest. You should also find out whether government officials are silent partners of the foreign firm.

Check into the reputation and character of potential co-venturers or agents. Their past conduct may indicate whether they'll be able and willing to comply with the FCPA. As part of your due diligence, look for any warning signs that suggest the need for more caution than usual (see box on page 41).

If your firm is planning an overseas joint venture, you may want to seek the agreement of the other owners not to sell, transfer or assign their interests in the venture without your consent. Such a transfer could raise some troubling issues, particularly if, for example, a co-owner sells a part interest to a government official who is in a position to direct business to the venture. Given this, it's a good idea to get all the owners to commit collectively to resolving any potential FCPA problems before an ownership transfer.

If your firm is taking a controlling interest in a foreign company, start an FCPA compliance program to educate employees and establish appropriate disciplinary measures for substantive or procedural violations of the program. Include at least seven general elements: a written program, a compliance officer, education and training, reporting, auditing, discipline and accountability. For the written program, prepare specific instructions and materials for officers, employees, directors and agents whose jobs will require special sensitivity to the FCPA.

To reinforce the importance of the program, hold workshops and seminars and take attendance. Reward employees for reporting both substantive and procedural violations of the compliance program, and build in disciplinary measures for those who commit any type of violations, as well as for their supervisors. Finally, monitor compliance through regular, scheduled audits.

While audits are necessary to ensure compliance with the accounting provisions of the FCPA, audits also monitor compliance with the anti-bribery provisions, since unaccounted-for funds may be evidence of illegal payments. Auditors can also look for evidence that the employees are following the compliance program. Wherever possible, your company should retain the right to appoint the outside auditors and conduct audits in advance of large payments to agents or co-venturers.

The Justice Department emphasizes that the best safeguard against a charge of making corrupt payments is full and open disclosure. The importance of such disclosure cannot be overstated. As the prosecutor in the recent Lockheed case put it, "While payments to foreign officials are not per se illegal, any actions inconsistent with full disclosure could give rise to allegations of corrupt intent." Your company should make widely known any business connections it (or its foreign subsidiary or co-venturer) has with foreign officials. It is especially important to notify anyone the officials may contact on behalf of the enterprise. Where appropriate, you should also get an opinion from prominent and respected local counsel stating that the activities are permitted under local law.

WHEN IN DOUBT, GET A SECOND OPINION

In a close case, your company may want to seek an opinion from the U.S. Justice Department that an investment or other prospective activity would conform with the department's enforcement policy. If you decide to do that, you must completely disclose all material facts about the business arrangement and the proposed conduct. In the case of a joint venture with a foreign official, the Justice Department may ask or require that your request include detailed representations and warranties from the official assuring his or her compliance with the act.

Here's an example of the protective measures the Justice Department may expect. The department issued a "no-action" letter to a U.S. company planning a minority investment that had obtained a pledge from the foreign company and a foreign employee not to violate the FCPA; retained the right to have the company's books and records audited for FCPA violations by a major U.S. accounting firm; agreed to inform the Justice Department and responsible foreign government authorities if it discovered the foreign company intended to or had violated the FCPA; and retained the right to sever its relationship with the foreign company if it learned of any FCPA violations.

The question of how much investigation is adequate and how many protective measures are enough is difficult to answer without knowing the facts and circumstances of the investment or the objective to be achieved. You will generally need a far higher level of due diligence when your company is purchasing a controlling interest than you will when it is buying a passive minority interest. A minority investment that involves an active role in the foreign company's affairs (through a seat on the board of directors, for example) will likely fall somewhere in between. Measures that probably would adequately protect against criminal conviction may not prevent an indictment or investigation, and no combination of protective measures may be enough to protect against a critical newspaper article that could damage your firm's reputation.

If a foreign company exhibits a pattern of corrupt conduct that is so widespread or entrenched it seems permanent, your firm may want to reconsider the investment. And your firm will need an exit strategy for the investments it does make (see box below). The Justice Department places a great deal of importance on a "rip cord" permitting a swift exit from a joint venture or other investment if FCPA violations occur. In some cases, workable termination arrangements may be easy to negotiate and incorporate into a joint venture agreement. In others, they'll be close to impossible. For example, how can your company avoid risking a lawsuit for significant damages if it exits a joint venture in which it provides all the management or expertise on major ongoing contracts? That's one of the more difficult questions that arises in connection with the FCPA, and one for which there is no ready answer. This unhappy prospect is an illustration, if you need one, of the advantages of picking business partners carefully in the first place and training them thoroughly in the do's and don'ts of the FCPA, so the need to end the relationship never arises.

RELATED ARTICLE: WHAT ARE THE RED FLAGS?

If you're thinking about investing in a foreign entity, here are a few important things to watch out for:

* Does the host country have a reputation for corruption?

* Does the potential agent or business partner have a reputation for corruption?

* Is the agent or partner refusing to sign an agreement that he or she understands the FCPA and will comply with it?

* Do you have reason to believe the agent or partner is engaged in illegal conduct under local law or is engaged in business with a silent partner who is a government official or member of the ruling family?

* Has anyone asked that the payments be made in cash or to third-country bank accounts?

* Is the agent requesting an unusually high commission? Has the prospective partner asked you to pay far too high a price for your share of the company?

* Have you discovered any other suspicious conduct by prospective partners, agents or government officials that should put you on notice?

RELATED ARTICLE: HOW TO EXIT GRACEFULLY

Here are some ideas for the provisions your company could build into a joint venture agreement as interim measures or long-term exit strategies in case of potential violations of the Foreign Corrupt Practices Act. You could expand any of these to cover all violations of U.S. law, not just FCPA violations. For that matter, you could also cover violations of the host country's law, giving the foreign co-venturer termination rights similar to yours, if you wanted. But note that in many cases, you could have difficulty getting your foreign partners to agree to these provisions, unless your firm enjoys a strong bargaining position. And other considerations, such as tax issues and the type of legal entity you have chosen for your joint venture, may affect which, if any, of these exit strategies is right for your firm.

Your termination agreement may provide that ...

* Your firm is not obligated to take any action which, in your judgment, would violate the FCPA.

* Your firm is not obligated to make any payments (including capital contributions) if it believes the payments would cause it to violate the FCPA.

* The joint venture will be liquidated immediately if your company believes in good faith (or on advice of counsel) that an FCPA violation has occurred.

* The joint venture will be liquidated immediately if your firm believes the foreign coventurer has breached an FCPA covenant in the agreement.

* The foreign co-venturer will buy out your company's interest if the company believes the foreigner has breached an FCPA covenant in the agreement.

* The foreign partner will indemnify your firm against any and all losses suffered as a result of the liquidation of the joint venture for an FCPA violation or as a result of a breach of an FCPA covenant or warranty.

* Your company is excused from performance if it believes the foreign partner has breached an FCPA covenant.

* Your firm has the right to terminate the venture if any of the FCPA representations in the agreement are materially untrue.

* Your company has the right to terminate the venture if a change in the foreign venturer's situation - for example, an individual becomes a foreign-government or party official, or a corporate joint venturer acquires a silent partner who is a government official - creates a potential FCPA risk or violation.

Ms. Ayres is an attorney with Davis Polk & Wardwell in Washington, D.C. You can reach her at (202) 962-7142.
COPYRIGHT 1996 Financial Executives International
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:includes related articles
Author:Ayres, Margaret M.
Publication:Financial Executive
Date:Mar 1, 1996
Words:2920
Previous Article:Catch a rising star.
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