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Presenting a live 90-minute webinar with interactive Q&A
Emerging Global Markets and
Risk-Based Due Diligence Overcoming Hurdles, Avoiding Restrictions, and Ensuring
Compliance When Doing Business in Restricted Environments
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, APRIL 26, 2016
Eric R. McClafferty, Partner, Kelley Drye & Warren, Washington, D.C.
Jay G. Martin, Vice President, Chief Compliance Officer and Senior Deputy General Counsel,
Baker Hughes, Houston
Daniel Patrick Wendt, Member, Miller & Chevalier, Washington, D.C.
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Conducting Due Diligence of Business
Relationships in Emerging Global Markets
PART I: HURDLES INVOLVED IN CONDUCTING DUE DILIGENCE IN
RESTRICTED ENVIRONMENTS
Daniel Patrick Wendt, Member
Strafford Webinar | April 26, 2016
© Miller & Chevalier Chartered 6
Agenda: Part I
• Background
– Purposes of third party due diligence
• FCPA trends re: third parties
– Quick overview of due diligence best practices
• Hurdles for effective due diligence
– Local laws
– Business culture
– Recordkeeping
© Miller & Chevalier Chartered 7
Purposes of Third Party Due Diligence
• International compliance
– Effective compliance program (non-statutory)
• U.S. Attorney’s Manual/U.S. Sentencing Guidelines
• Shareholder litigation
– Anti-Corruption/Foreign Corrupt Practices Act
– Sanctions and export controls
– Anti-money laundering
– Code of conduct
• Fraud and conflicts of interest
© Miller & Chevalier Chartered 8
Trends: Countries of Focus
23
16
13
9 9
7 7 7 7 6 6 6 6 6
5 5 5
3 3 3 3 3 3 3 3
Note: Updated through March 29, 2016. This chart tracks each country implicated in the corporate FCPA dispositions brought by the SEC
and DOJ. Where a matter involved more than one action brought against a particular company and its subsidiaries and affiliates, those
actions are “combined” and counted as one.
Countries Implicated Most Frequently in Corporate FCPA Enforcement Actions
2009 – 2016
© Miller & Chevalier Chartered 9
Enforcement Actions Involving Third Parties
9 9
63
49
0
10
20
30
40
50
60
70
1992-1996 1997-2001 2002-2006 2007-2011 2012-2016**
5
* These statistics combine all related resolved enforcement actions involving each company and its subsidiaries and affiliates.
**2012-2016 numbers are estimated based of pace of enforcement through March 29, 2016.
Combined Corporate Enforcement Actions Involving Third Parties*
1992 through 2016
© Miller & Chevalier Chartered 10
Trends: Focus on Non-Traditional Third Parties
• In recent years, the agencies have expanded their focus
beyond traditional third party intermediaries (e.g., sales and
customs agents, consultants, lobbyists):
– Channel partners/distributors (Hewlett Packard, Mead Johnson)
– Stevedoring company (ADM)
– Insurance company (ADM; J&J; IBM; and BAE)
– Simulation technology and power generation subcontractors (Data
Systems)
– Unspecified "vendors" (Oracle; Pride)
– Driver (Paradigm)
– Landlord (Paradigm)
© Miller & Chevalier Chartered 11
Due Diligence Keys: Know Your Partners
• Due diligence
– Business rationale
– Qualifications
– Ownership
– Relationships with officials
– Reasonableness of
compensation
• Tiers of due diligence
– Type of relationship
– Red flags arising from due
diligence
– Limits of due diligence news
regarding Unaoil
• Safeguards
– Contract terms
– Certifications
– Monitoring
© Miller & Chevalier Chartered 12
Local Laws Affecting Due Diligence
• General privacy laws
– Limiting the ability to pursue due diligence of entity ownership,
affiliations, reputation, personal background
– China: Prosecution of ChinaWhys
• Types of private information: Residence addresses, family members, exit-
entry information, real estate ownership
• Limitations on corporate information
– U.S. registrations: Delaware, Oregon
– Offshore jurisdictions: BVI, Mauritius, Cyprus, etc.
• Panama Papers
– Registrations
• China: Many different corporate authorities
© Miller & Chevalier Chartered 13
Local Laws Affecting Due Diligence
• Data privacy
– Nature of legislation, regulations and enforcement varies
– Definition of “personal data” is often very broad
– “Processing” data (often any third party access)
– Cross-border transfers of data
• Cross-recognition among some regions
• United States isolation
– Negotiation of new US-EU Safe Harbor Standard
– Forms of consent vary depending on collection, use
© Miller & Chevalier Chartered 14
Local Laws Affecting Due Diligence
• National security/military secrets
– Depends on nature of industry and business partners (e.g., state-owned
enterprises)
– Can often cloud business transparency, limit discussions and/or access
to documents
– Can also increase risks of conducting market-based due diligence
(sensitive topics, entities, ownership)
– Can often be used as a shield to hide improper dealings?
• Business justifications: Gov’t Agency X has directed use of Entity Y
• Limited responses to questionnaires
• Opaque ownership, limited references
© Miller & Chevalier Chartered 15
Local Laws Affecting Due Diligence
• Local partner requirements
– Multinationals obligated to use national/local partner in various markets
– Pool of potential partners may be limited
– Can potentially limit the effectiveness of due diligence
© Miller & Chevalier Chartered 16
Business Culture Affecting Due Diligence
• Language
– Necessity to conduct due diligence using resources in all relevant
languages
• Ownership/shareholders/offshore entities
– Business culture of using nominal shareholders?
• Often require extensive cooperation from target and/or extensive market
intelligence in order to resolve issues
– Familial relationships
• Direct family
• Extended family
– Trusts/control agreements
© Miller & Chevalier Chartered 17
Business Culture Affecting Due Diligence
• Patronage/protection
– Unofficial links to government officials, other prominent locals
• Necessity to use third parties for business development
– Brazil: five years ago
– Brazil: post-Operation Carwash
• Access to information in-country
– Limited press?
– Close-knit business communities?
– Monitoring of communications?
© Miller & Chevalier Chartered 18
Recordkeeping Concerns
• How to handle information gained during due diligence
– Retrieving data from high-risk markets
– Storing sensitive data (in-country vs. offsite)
– Communicating results back to high-risk markets?
• Considerations
– Local law concerns (data privacy, national security, etc.)
– Necessity for local personnel to know results
– How to handle local monitoring/investigations/raids
• Discussions of government officials?
• Discussions of private citizens with significant local influence?
• Information that may otherwise be sensitive?
Due Diligence Hurdles in Emerging Markets – Reducing Risk
Eric McClafferty, Partner
(202) 342-8841
Overcoming Obstacles to Diligence in Emerging Markets
As just discussed, many emerging markets present high levels of
compliance risk
FCPA, political risk, fraud, export control, national security
concerns, data privacy, and more
Combine this with difficulties in conducting due diligence in
Emerging Markets
Lack of available or easily searchable records
Cultural issues, including local lack of experience/familiarity with
diligence research
This results in a high risk situation with less than adequate access to
information needed to reduce that risk
Moreover, timing is often very short, especially in the M+A context
20
What do you do in response to these challenges?
You must work to identify areas of particular risk
Red Flags
21
Identifying Red Flags -- Examples
22
Unusual payment arrangements for provision of services, including excessive payment for limited services/access
A recommendation by a government official to hire a particular third party
Doing business in country with reputation for corruption
Refusal by a business partner to agree to anticorruption provisions in agreements
Evidence of, or requests for unusually high commissions
Lack of transparency and other issues in accounting records
Joint-venture partner third party that does not appear capable of performing the services offered
More Red Flags
Lack of internal controls
Lack of code of conduct, anti-corruption, anti-fraud,
and other compliance program indicators (more
common than you might think)
Sales to or purchases from government or State
Owned Enterprise (SOE)
Charitable giving concerns
Gift, travel, entertainment concerns
Marketing expense issues
23
How do we spot red flags?
Recognize the context and adapt the approach
Acquisition diligence?
Selecting a third party service provider?
Evaluating a supplier?
Analyzing potential Government or non-government customer?
Different contexts require different approaches.
In each context, take a systematic approach so that basic questions
are asked and answered every time you undertake a similar review
(recognizing that the process will improve over time)
But build in flexibility to adapt to the situation – additional
questions and follow-up based on initial research and what is
learned as the review progresses
24
Basic and advanced research techniques
The Internet
Databases – many types (D+B, Hoovers, public records, news, legal
filings)
Transparency International
TRACE and similar service providers
U.S. Government – Example
U.S. Commercial Service
25
26
27 27
28 28
29 29
Research techniques continued
Questionnaires for your business personnel
Questionnaires for the target
Do business with the government?
Connections to current or past government or political party
personnel?
Interviews
Site visits
Third party investigators (international and local) and local attorney
resources. Retained by counsel if possible to protect privilege to
extent it is available.
Risks and benefits
And other tools
30
Systematic, Reliable, Defensible Approach
Again, recognizing that there is a continuum of risk, of available
resources, and limits on time --
Perfection typically not obtainable
When to devote maximum resources
Are you in a heavily scrutinized industry?
Lots of $ at stake?
Dealing in a very corrupt environment?
What is the minimum?
Want to be sure you are getting the basic information each time
Forms, checklists, questionnaires demonstrate the methodology and
provide a record upon which decision was based.
31
Conducting Document Reviews and Interviews
Selecting the team. Outside counsel? Forensic accountants?
Language capability
Again, recognize the context and identify roles. For example,
Acquisition target? Cannot afford to antagonize senior members
of the target company.
But you need to obtain information.
Review the documents before starting the interview, or interview
early? On site file review? What are we looking for?
How does the company do business?
Sell to the government? How much, how often?
Use third party intermediaries? How much, how often? How
paid?
32
Document Review -- Examples
Organizational Chart
Names and positions of personnel responsible for compliance
Code of Conduct and training on Code and compliance system
Specific anticorruption, fraud, etc., policies, procedures
Past experiences with corruption (previous investigations, violations,
penalties). Past audit reports.
Samples of contracts with third parties – agents, distributors,
customs brokers, forwarders, etc.
Financial reports, including expense reimbursement data
Hotline reports?
Emails?
33
Interviews continued
Who gets interviewed?
Senior personnel and compliance personnel
Who deals with government customers, SOE’s?
Who knows about payments, especially to third parties?
How to interview? Elicitation through to interrogation.
Get them talking about their business. No judgement. No
explaining FCPA, or other legal provisions. Focus on the facts.
Be ready to get at relevant information through several avenues.
Compare and contrast answers.
In person or on video? Watch body language and other clues, but
recall cultural context. You may not be an expert.
34
Interview approaches, continued.
Leave the door open to come back with more questions.
Watch data privacy issues.
Documenting the review process.
35
36
Positive and negative factors that need to be considered in any evaluation of a third party being used in a high risk country
• Third Party Characteristics – Positive Signs
• No Government Contacts • Clear Ownership • Commercial Capability • Experience in the Region • Commercial Directory Listings • Past Positive Relationship • Favorable Business References • Based in Low-Risk Country • Established Facilities
– Negative Signs • Related to Government Official • Government Official Referred • Lacks Licenses or Registrations • Lacks References • Lacks Experience • Primary Strength is Influence • Incorporated in High-Risk Country • Questionable Past
37
Positive and negative factors that need to be considered in any evaluation of a third party being used in a high risk country • Third Party Requests
– Positive Signs • Effort-based Compensation • Concrete Deliverables • On-budget, On-time Performance • Interface with Qualified Staff • Detailed Scope of Work • Transparent Payment Process • Accurate Documentation
– Negative Signs • Refuses Corruption Contract Provisions • Excessive Compensation • Misleading Payment Structure • Anonymity • Success Fee • Subcontracting to Third Party • False Documents
38
Positive and negative factors that need to be considered in any evaluation of a third party being used in a high risk country
• Third Party Operations
– Positive Signs
• Performance Consistent with Proposals
• Accurate Documentation
• Anti-Corruption Program
• Well-Trained Employees
– Negative Signs
• Becomes Target of Investigation
• Unclear or Suspicious Documentation
• Requests Backdating or Fraudulent Documentation
• Refuses to Certify Compliance
• Connection with Government or Customer Emerges
• Suspicious Expenses or Travel
39
Positive and negative factors that need to be considered in any evaluation of a third party being used in a high risk country
• Third Party Payments & Invoices – Positive Signs
• Commercially Reasonable Terms • Regular Channels • Matches Commercial Capability • Reasonable Compensation • Payment in Country • Established Banks
– Negative Signs • Third Countries or Parties • Third-Country Banks • Shell Companies • Post Office Boxes • Larger Payments During Government Interaction • Success Fee • Unexpected Bonuses or Loans • Invoices Paid Too Quickly • Requests Negotiable Currency
40
Thank You
Eric R. McClafferty
Kelley Drye & Warren
Jay G. Martin
Baker Hughes
Daniel Patrick Wendt
Miller & Chevalier