Bankruptcy & Insolvency

• Construing The Meaningful Cautionary Statement Defense: When "Or" Means "And"

Global Markets

• Before Foreign Acquisitions, Check FCPA Compliance

Corporate Governance & Directors' Duties

• Bank Boards Need To Reassess Priorities And Expand The Number Of Seats

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Covered state-owned entities. Sophisticated dealmakers and compliance professionals understand the provisions of the USA PATRIOT Act against money laundering, but not many realize the rigorous due diligence mandated by the Foreign Corrupt Practices Act (FCPA) for overseas M&A. Persons working in private industry may be considered "foreign officials" under the FCPA, advise attorneys Rebekah Poston, David Saltzman, and Gregory Bates, if the organization in which they work could be considered a "foreign government instrumentality" or state-owned entity. Certain factors determine whether the employing entity would be viewed as such: what percentage of ownership, voting rights, and degree of control is held by a foreign (non-US) government; whether the employees of the entity have the rights of those holding governmental positions; and how the home country characterizes the entity. The analysis should also consider whether the entity was formed primarily to serve the public good and whether the home country would prosecute bribery of the entity's employees as public corruption.

Using a consultant. Companies often hire consultants to assist in overcoming the regulatory hurdles when operating in a foreign country. Because the US Department of Justice has brought FCPA suits based on the actions of consultants, due diligence before hiring one is critical to assessing whether the consulting firm might violate the FCPA. The authors suggest that executives question a consultant's understanding of the FCPA requirements and the antibribery laws of the home country. Examine the backgrounds of the consultant's principals and owners to determine if anyone could be considered a foreign official. Ask whether the consultant has a code of conduct and internal controls. Ascertain if the consultant is usually paid a success fee (which might encourage the use of inappropriate means to obtain the desired result for a client). Use public information to learn about past problems involving the consultant. Negotiate appropriate representations and warranties in the consultant's contract, including: assurances of compliance with the FCPA; specified obligations if the consultant discovers an FCPA violation; the right to audit the consultant's books; and the right to withhold payment for violations. The contract should also require the consultant to provide annual certification that tracks the language of the statute, stating that it has not made any unlawful payment to induce a foreign official to act. Refuse to enter into unusual payment arrangements, such as paying third parties for the consultant's services.

Payments for travel, gifts, entertainment, and grease. FCPA violations often stem from the payment of travel and entertainment expenses. The FCPA contains an affirmative defense for bona fide business expenditures paid to foreign officials if they are directly related to promoting or understanding the company's products. A second defense covers gifts of value that are made pursuant to the laws of the foreign official's country. To avoid issues under the FCPA, the authors advise companies not to provide a stipend and instead to pay service providers directly. Reasonable entertainment is permissible if the main purpose of the trip is business. Expenses for extended travel beyond the business portion of the trip and expenses of spouses or friends should not be covered since they are not related to any business purpose. If, after due diligence, a company has reason to believe a violation of the FCPA may have occurred, it is obligated to investigate further. Even small payments to low-level officials may violate the FCPA. Facilitation payments (often called "grease") are permissible if they facilitate a routine, nondiscretionary governmental action. However, if paid regularly, over time, and always to the same foreign official, a payment will probably be construed as an improper bribe.

Accounting issues. The FCPA requires companies to keep books and records that fairly and accurately reflect business transactions. The books and records must be prepared in accordance with generally accepted accounting principles. These rules apply to all of a company's expenditures, the authors emphasize, not just those that would be considered material. Account separately for gifts, entertainment expenditures, and facilitation payments. The company must also maintain a system of internal controls to ensure that transactions are executed in accordance with management's authorization and are recorded as required to prepare financial statements in accordance with GAAP. Recorded assets should be compared with actual assets and actions taken with respect to any differences. The board (or the audit committee) should oversee the development of the internal controls. Test policies and procedures from time to time, and make changes if necessary.

Abstracted from Review of Securities & Commodities Regulation, published by RSCR Publications, 25 East 86th Street, Ste. 13C, New York NY 10028-0553. To subscribe, call (866) 425-1171; or visit http://www.rscrpubs.com.