1. FCPA Compliance Conducting Due Diligence on Third Parties November 10, 2015
Introductions: Michelle; how we are here, International Trade intersects with FCPA
Jesica Gilbert
Director of Ethics and Compliance
American Bureau of Shipping
Elsa Manzanares, Marla Poirot, and Michelle Schulz
Partners
Gardere Wynne Sewell LLP

3. Marla Poirot

5. Michelle Schulz

7. Elsa Manzanares

8. Overview
Our focus today is practical guidance on how to conduct Foreign Corrupt Practices Act (FCPA) due diligence
FCPA Red Flags
Due Diligence Checklist
Example
How to analyze due diligence information you receive
Recordkeeping
As business transactions become more global, it seems International trade, FCPA, ITAR become more comingled with typical business transactions. We have seen many mid size and even larger clients for the first time conducting business abroad whereas before they were selling products and services domestically:
Those of you in our audience that should be most interested in Int’l trade and or FCPA:
If you have multinational clients, foreign clients or clients that want to expand internationally, clients that import and export products
If you are involved with clients that have Mergers & Acquisitions – Joint Ventures: Either acquiring or being acquired by entities doing significant business globally (trade, foreign locations, etc)
Industry specific: If you have clients in oil & gas, power/engineering consulting, healthcare/pharmas, aerospace, mining, and the list of industries that have exposure to international trade and FCPA is growing exponentially.

9. What are FCPA Risk Countries?

10. Consider
As counsel to multi-national clients, what exposure have you had to the Foreign Corrupt Practices Act?

11. What Are FCPA Red Flags For You?
Government Contacts
What was the nature of the contact with you
Does the person claim to be an “insider?”
Third-Party Intermediaries (“TPIs”) – e.g., brokers, agents, consultants
What was the nature of the contact with you?
Does the TPI have a background in these transactions?
What is your company’s history with the TPI? (know your customer)
Always ask yourself: is there something unusual about the way the person approached you or the way they want to conduct business with you?

12. Other FCPA Red Flags to Watch
Lack of formal anti-corruption policies or controls
Doing business in countries with a high risk or history of public corruption
Significant use or reliance on third party finders/influencers
Lack of details in third party contracts

13. Other FCPA Red Flags to Watch (cont.)
Requests for charitable contributions
Sales to foreign government agencies
Request for commission payments to un-related country

14. Other FCPA Red Flags to Watch (cont.)
Excessive payments for services rendered
Unusual payment terms (example: cash in advance)
Unnecessary involvement of agents in transactions

15. Basic Elements of Effective FCPA Program
Training
Manual (policies and procedures)
Designated Compliance Officer
Due Diligence Procedures

16. Due Diligence Checklist
Country Reputation
Capabilities/Compensation
Questionnaires/References
Financial Information
Interviews
Level and amount of due diligence will depend on the nature of the transaction, but basic elements are the same.

17. Due Diligence Checklist - Example
You are approached by a third party who claims to be an agent of the Minister of Agriculture of Nigeria. He wants to assist you with obtaining a contract with the Ministry of Agriculture. What due diligence steps do you take?
Step 1: What is Nigeria’s reputation for corruption?

18. Due Diligence Checklist – Example (cont’d)
You are approached by a third party who claims to have contacts with the Ministry of Agriculture of Nigeria. He wants to assist you with obtaining a contract with the Ministry of Agriculture. What due diligence steps do you take?
Step 2: What are the capabilities of the TPI for doing this work? What compensation are they requesting?

19. Due Diligence Checklist – Example (cont’d)
You are approached by a third party who claims to have contacts with the Ministry of Agriculture of Nigeria. He wants to assist you with obtaining a contract with the Ministry of Agriculture. What due diligence steps do you take?
Step 3: Request TPI complete FCPA questionnaire.

20. Due Diligence Checklist – Example (cont’d)
You are approached by a third party who claims to have contacts with the Ministry of Agriculture of Nigeria. He wants to assist you with obtaining a contract from the Ministry of Agriculture. What due diligence steps do you take?
Step 4: Request financial information from TPI.

21. Due Diligence Checklist – Example (cont’d)
You are approached by a third party who claims to have contacts with the Ministry of Agriculture of Nigeria. He wants to assist you with obtaining a contract from the Ministry of Agriculture. What due diligence steps do you take?
Step 5: Conduct interview of key representative(s) from the TPI’s company.

22. Reviewing the Information You Receive: Issues to Consider
The country has a reputation for corruption (see the Transparency International Corruption Perceptions Index)
The intermediary requests anonymity or that the relationship remain a secret
The intermediary does not cooperate with the due diligence investigation or refuses to make representations and warranties
The intermediary makes suspicious statements such as needing money to “get the business” or “make the necessary arrangements”

23. Reviewing the Information You Receive: Issues to Consider (cont’d)
The intermediary has a reputation for unethical conduct, including previous termination for same, or previous civil or criminal penalties
The intermediary has family or business ties to government officials (or was recommended by a government official)
The intermediary makes large or frequent political contributions
As you are getting to know the new TPI or client there are red flags you need to look out for:
Reputation:
Country: As we spoke of before the country where you are conducting business reputation for corruption is an indicator of what to expect: Example Kazakhstan – the government has held power since the early 1990’s and the president and his party have all the power. The anti corruption laws have improved yet corruption experts state that the laws are not enforced and no bribery convictions have been brought against the government officials except for the ones that oppose the President. So the opportunity for corruption is 100% open for government officials.

24. Reviewing the Information You Receive: Issues to Consider (cont’d)
The intermediary is not expected to perform substantial work
The intermediary lacks the experience, staff or facilities to perform the required work
The intermediary has poor financial stability or credit
As you are getting to know the new TPI or client there are red flags you need to look out for:
Reputation:
Country: As we spoke of before the country where you are conducting business reputation for corruption is an indicator of what to expect: Example Kazakhstan – the government has held power since the early 1990’s and the president and his party have all the power. The anti corruption laws have improved yet corruption experts state that the laws are not enforced and no bribery convictions have been brought against the government officials except for the ones that oppose the President. So the opportunity for corruption is 100% open for government officials.

25. How Do You Verify the Information Provided to You?
If you have determined that there are limited or no red flags, you will still need to verify the information provided
Example: The U.S. Commercial Service International Company Profile is cost effective, but it can be slow. Also, they do not conduct due diligence, they only validate references
If there are significant red flags in high risk countries consider a comprehensive due diligence investigation by independent trained investigators

26. RECORDS RECORDS RECORDS
What Records Should You Keep
Your due diligence file should contain the following
Detailed notes on telephone calls (date, time, name, title)
Letters s
Newspaper articles
Denied party screening results
Internet research – print it out!
Reports (for example, background checks)
Interview notes
Your analysis of red flags

27. RECORDS RECORDS RECORDS (cont’d)
Keep records during all steps in the due diligence process
Keep copies of the country risk evaluation
Keep financial information and capability/compensation information
Keep all references and questionnaires
Keeping Written Records is Key
Lack of records invites closer look at your practices
Records provide proof that you conducted due diligence – without records, you have no proof.

28. Document, document, document
DOJ Guidance
Emphasis on pre-closing due diligence and post-closing integration of Target into Acquirer’s compliance and internal control programs.
It is important to educate the diligence team on FCPA issues specifically
You must factor in the necessary time for an effective FCPA review
Follow up on identified red flags and risk areas
Document, document, document

29. Factors affecting the appropriate scope of review:
DOJ Guidance (cont.)
Factors affecting the appropriate scope of review:
Deal structure and size – what is material?
Industry of the Target
Location of operations
Competition

30. DOJ Guidance (cont.)
DOJ has identified five specific areas that Buyers should inquire about with Targets:
Interaction with foreign governments as customers
Interaction with foreign governments at JV partners
Government licenses and approvals required to operate abroad
Requirements relating to customs in foreign countries
Relationships with third-party representatives, including how those representatives are vetted

31. DOJ Guidance – M&A/Due Diligence
DOJ encourages companies in M&A to:
Conduct thorough risk-based due diligence
Implement the acquiring company’s code of conduct and anti-corruption policies as quickly as possible
Conduct FCPA training for the acquired entity’s directors and employees, as well as TPIs
Conduct an FCPA audit of the acquired entity as quickly as possible
Disclose to DOJ any corrupt payments discovered during the due diligence process.
This will factor into whether and how DOJ will seek to impose post-acquisition successor liability
FCPA Opinion Procedure Release

32. Thank You Elsa Manzanares (713) 276-5172 emanzanares@gardere
Thank You Elsa Manzanares (713) Marla Poirot (713) Michelle Schulz (713)