challenges of conducting due diligence investigations in china

The Challenges of Conducting Due Diligence Investigations in China

Thomas Fox, Attorney at Law

© Thomas R. Fox / tomfoxlaw.com PC All Right Reserved

Thomas Fox

Tom Fox has practiced law in Houston for 30 years. He now assists companies with FCPA compliance, risk management and international transactions. He was most recently the General Counsel at Drilling Controls, Inc., a worldwide oilfield manufacturing and service company. Before that he was Division Counsel with Halliburton Energy Services, Inc. where he supported Halliburton’s software division and its downhole division, which included the logging, directional drilling and drill bit business units.

Today, Tom writes and speaks nationally and internationally on a wide variety of topics, ranging from FCPA compliance, indemnities and other forms of risk management for a worldwide energy practice, tax issues faced by multi-national US companies, insurance coverage issues and protection of trade secrets.

© Thomas R. Fox / tomfoxlaw.com PC

Doing Compliance


The FCPA Year in Review/Anti-Bribery Leadership


5 Steps of Third Parties

Management


Business Justification

Qualification Questionnaire

Due Diligence and its evaluation

Contracting

Management of the Relationship


Peter Humphreys

and Ms. Wu


Background

Hired to investigate ‘sex tape’

Not told about whistleblower or ABC investigation

Investigation led to prominent Shanghai families

Arrested in July 2013

Alleged to have violated 2009 Privacy Law


The Allegations

Not told what they were charged with until day of trial

Alleged to have obtained about 250 pieces of private information about individuals, including government-issued identity documents, entry and exit travel records and mobile phone records, all apparently in violation of China’s privacy laws


The Trial

Convicted at one-day trial

Originally to be held in secret but held in public due to US-China trial bi-lateral treaty

Convicted for obtaining personal information as well as government records on identification numbers, family members, real-estate holdings, vehicle owner, telephone logs and travel records


GSK Continues


GSK and China Business Unit

GSK found guilty in one day trial

• $491MM fine

Reilly and 3 others found guilty

Suspended sentences


The Saga Continues

Humphrey and Wu-found guilty in one-day trial

Sex tape of GSK head in China

Responses to Whistleblower

GSK investigating corruption in Poland, Syria and other countries

SFO formal investigation


More to Come

46 other GSK employees caught up in prosecution

Current and former employees sue for bonuses

GSK under investigation in UK and US


Globalization of Enforcement

SBM Offshore – DOJ defers to Dutch prosecutors to permit $240 million settlement

SFO and UK Bribery Act beginning to develop some cases

Brazil opens Embraer case for initial Clean Companies Act prosecution


Enforcement Actions


Corporate-Alcoa

Alcoa-$384MM fine, including $175MM in profit disgorgement. 5th Largest fine of all-time. No. 1 in disgorgement amount

One Guilty in UK, one prosecution dropped

Fine could have been up to $1bn according to DOJ


Corporate-HP

$108MM total fine

Multi-country bribery schemes. Complete breakdown in internal controls

Multiple enforcement tools

Criminal Plea in Russia

DPA in Poland

NPA in Mexico


Avon

2004 to 2008: $8 million systematic bribery scheme to enter and maintain China door-to-door sales market. Up to $750 in total costs

Internal audit discovered bribery scheme

Senior executives at Avon ordered sanitizing of audit report and directed auditor to gather copies of initial report to conceal

Senior executives fired and will be prosecuted


Alstom

Record settlement - $772 million

$75 million in bribes to earn $4 billion in contracts

Grand jury investigation was obstructed

Individual prosecutions for Indonesia broken out to push company to cooperate; DOJ was willing to keep charging individuals

Systemic breakdown and culture of corruption


The Esquenazi Decision and Investigations


Court Creates Two-Prong Test

Recognizing that the least is not dispositive, the Court articled a Two-Prong Test:

Control Test

Function Test


Control Test

1) The foreign government’s formal designation of the entity;

2) Whether the government has an interest in the entity;

3) The government’s ability to hire and fire the entity’s principals;

4) The extent to which the entity’s profits, if any, go directly into the governmental fisc;

5) The extent to which the government funds the entity if it fails to break even; and

6) The length of time these indicia have existed.


Function Test1) Does the entity have a monopoly over the function it exists to carry

out;

2) Does the foreign government subsidize the costs associated with the entity providing the services;

3) Does the entity provide services to the public at large in the foreign Country; and

4) Does the foreign government generally perceive the entity to be performing a governmental function?


Opinion Release 14-02


Focus on pre-acquisition due diligence in the mergers and acquisition context

Deep dive into questionable facilitation payments

Investigation allowed disclosure, road map forward and proper valuation

No DOJ action if proper post-acquisition remediation and integration

Business Requirements for Compliance


Scott Killingworth and P2P

“Embodied in contract clauses and codes of conduct for business partners, these obligations often go beyond mere compliance with law and address the methods by which compliance is assured. They create new compliance obligations and enforcement mechanisms and touch upon the structure, design, priorities, functions and administration of corporate ethics and compliance programs. And these obligations are contagious: increasingly accountable not only for their own compliance but also that of their supply chains, companies must seek corresponding contractual assurances upstream. Compliance is becoming privatized, and privatization is going viral.”


Downward Push of Compliance

Purchaser oversight of your compliance function

Bank covenants requiring compliance program

Private equity scrutiny and oversight

D&O insurance coverage


Questions?


Thank-you for Participating in Today’s Webinar

How you can reach Thomas Fox

Ph: 832-744-0264

[email protected]

Follow me at www.twitter.com/tfoxlaw.

Follow my blog at http://tfoxlaw.wordpress.com/

Contact us at i-Sight

[email protected]


challenges of conducting due diligence investigations in china

Business

pc thomas

chinathomas fox

wu thomas

partiesmanagement thomas

reserved thomas

relationship thomas

travel records thomas

privacy law thomas