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DoJ Opinion Relents on FCPA Risks

By Melissa Klein Aguilar — July 8, 2008

he Justice Department has given compliance executives some fresh Foreign Corrupt Practices Act settlements to chew over, on the chronic perils of inheriting FCPA problems via acquisition and of doing business in China.

RELATED RESOURCES Text of DOJ Opinion on Halliburton (June 13, 2008) DOJ Press Release on AGA Medical Corp. (June 8, 2008) DOJ Press Release on Faro Technologies (June 8, 2008) White & Case on Halliburton FCPA Violations (June 26, 2008) Skadden Arps Alert on AGA and Faro (June 2008) Related Coverage Advice, Enforcement on FCPA (June 10, 2008) FCPA Enforcements Roll Onward (April 22, 2008) Latest FCPA Action Spotlights Foreign Units (Dec. 4, 2007) FCPA Case: Self-Disclosure Benefits (Oct. 30, 2007) FCPA on Hosting Foreign Officials (Oct. 16, 2007) Spotting FCPA Risks Is Daunting (April 21, 2007)

A June 13 Justice Department opinion gives companies a “new way forward” to help avoid inheriting FCPA liability through acquisitions when companies can’t perform sufficient due diligence before a deal, according to Richard Cassin of the firm Cassin Law.

Cassin

The opinion means acquirers may be able to avoid FCPA risk even if the target company has undiscovered compliance problems—for a price, Cassin says. The catch is that companies will have to go to the Justice Department before the deal closes and be prepared to make compliance commitments.

The opinion came in response to a request by Halliburton, which is trying to acquire a British-based oilfield services company. Halliburton faces legal restrictions under the U.K. bidding process that leaves it unable to complete appropriate FCPA and anticorruption due diligence until after the transaction closes.

Usually the acquiring company is on the hook for any FCPA violations the target company may have committed. The Justice Department, however, agreed to suspend any enforcement action against Halliburton for six months, provided Halliburton follows a stringent post-closing plan and undertakes remediation efforts.

As a result of the opinion, companies forced to acquire overseas businesses quickly “now know what they’ll have to do to protect themselves,” Cassin says. “They may not like the answer, but at least there’s some clarity.”

For corporate lawyers who have long debated the merits of volunteering FCPA woes to the Justice Department, the Halliburton opinion presents “a tangible benefit” to doing so, says George Terwilliger, a partner in the law firm White & Case. He describes the ruling as a de facto non-prosecution agreement.

Terwilliger

“The government is clearly putting in black and white the nature and extent of the forbearance it is extending for self policing and voluntary disclosures,” Terwilliger says.

The agreement outlined in the Halliburton opinion requires the company to do several things. Foremost, it must disclose any FCPA violations it does discover to the Justice Department immediately. It must also submit a plan, within 10 days, that describes the due diligence Halliburton will conduct over the course of its six-month grace period.

Halliburton must also retain external counsel and third-party consultants to conduct that due diligence; have all agents of the acquired company complete new contracts with anticorruption provisions; and institute its own Code of Business Conduct with anticorruption policies and procedures immediately after closing.

While the immunity conferred “reflects a high expectation for corporate conduct,” Terwilliger says, “It’s not by any means impossible to achieve.”

The opinion applies only to Halliburton, but it does include a telling footnote: The Justice Department “discourages companies wishing to receive an FCPA Opinion Release in the future from entering into agreements which limit the information that may be provided to the Department.”

HALLIBURTON OPINION Below is an excerpt of the opinion the Justice Department published regarding Halliburton’s FCPA risks in acquiring a British company. First, consistent with precedent, the Department believes that the execution of the transaction here would not, in and of itself, create FCPA liability for Halliburton. In FCPA Opinion Procedure Release 2001-01 (May 24, 2001), the Department addressed whether funds a corporation contributes as part of a corporate combination transaction may be considered a “payment” that is “in furtherance of” a bribe within the meaning of 15 U.S.C. § 78dd-1. The Department discussed the risk that funds contributed to a joint venture by Corporation A might be used to make payments to an agent under pre-existing unlawful contracts that Corporation B contributed to the joint venture. Those issues, however, do not appear to be present here. Target is a public company listed on a major exchange, and at least 65 percent of its shares are held by large, institutional investors. Any amounts Halliburton pays to acquire Target will go to shareholders and not to Target itself. It is unlikely that any Target shareholders were corruptly given their shares such that the purchase of Target by Halliburton would improperly enrich such shareholders. Moreover, as a practical matter, it is impossible for any acquirer of a substantial public company to determine the identity of all shareholders and investigate how such shares were acquired. Second, in light of the facts presented here and the particular restrictions in U.K. law regarding the bidding process, the Department does not presently intend to take any enforcement action with respect to any pre-acquisition conduct by Target disclosed to the Department during the 180-day period following the closing, provided Halliburton satisfactorily proceeds in accordance with the post-closing plan and remediation detailed above. Third, the Department notes that an acquiring company may be held liable as a matter of law for any unlawful payments made by an acquired company or its personnel after the date of acquisition. In that regard, in a prior Opinion Release, which related to an acquiring corporation’s potential FCPA liability based on the target's pre-acquisition conduct, the Department did not provide assurances with respect to unlawful “payments made after the date of acquisition.” Release No. 2003-01 (January 15, 2003). Under the circumstances here, however, there is insufficient time and inadequate access to complete appropriate pre-acquisition FCPA due diligence and remediation. As represented by Halliburton, under the application of the U.K. Takeover Code, it has no legal ability to require a specified level of due diligence or to insist upon remedial measures until after the acquisition is completed. As a result, Halliburton’s ability to take action to prevent unlawful payments by Target or its personnel during the period immediately after the closing has been severely compromised. Assuming that Halliburton, in the judgment of the Department, satisfactorily implements the post-closing plan and remediation detailed above, and assuming that no Halliburton employee or agent knowingly plays a role in approving or making any improper payment by Target, the Department does not presently intend to take any enforcement action against Halliburton for any post-acquisition violations of the antibribery provisions of the FCPA committed by Target during the 180-day period after closing provided that Halliburton: discloses such conduct to the Department within 180 days of closing; stops and remediates such conduct within 180 days of closing, or, if the alleged conduct, in the judgment of the Department, cannot be fully investigated within the 180-day period, stops and remediates such conduct as soon as it can reasonably be stopped; and completes its due diligence and remediation, including completing its investigation of any issues that are identified within the 180-day period, by no later than one year from the date of closing. Source Department of Justice.

Terwilliger, a former deputy attorney general at the Justice Department, says that footnote is diplomatically telling other companies in similar situations that they should go down the same path. Still, he adds, what other circumstances might prompt prosecutors to give a company the same “rather extraordinary treatment” as Halliburton remains unclear.

Cassin says the opinion could raise concerns for foreign businesses on the menu of acquisitive American corporations. Directors, executives, and managers of that foreign company might unexpectedly find themselves exposed to criminal prosecution under the FCPA if their company is acquired, he adds. That threat could complicate the picture for U.S. companies on the prowl.

The China Syndrome

In separate but still notable FCPA news, recent enforcement actions against AGA Medical Corp. and Faro Technologies highlight the substantial FCPA risk in doing business with intermediaries in China.

In June, Minnesota-based AGA agreed to pay a $2 million criminal penalty and enter into a three-year deferred prosecution agreement in connection with corrupt payments to Chinese government officials that violated the FCPA. Two days later, Florida-based Faro Technologies, a maker of measurement equipment and software, agreed to pay $ $1.1 million in criminal penalties as part of a two-year non-prosecution agreement.

A Justice Department filing charged AGA with one count of conspiring to make bribe payments to Chinese officials and one count of violating the FCPA in connection with the authorization of corrupt payments to Chinese officials.

According to the complaint, from 1997 to 2005 AGA used its local distributor to arrange corrupt payments to doctors in China employed by government-owned hospitals in exchange for the purchase of AGA’s products. Prosecutors also alleged that from 2000 to 2002, AGA agreed to make payments through its local distributor to government officials employed by the State Intellectual Property Office to get patents approved.

The complaint against Faro says the company used its subsidiary in China to sell products directly to the Chinese automotive, aerospace, and consumer goods industries. In 2004 and 2005, a Faro employee authorized other Faro employees to make $4.9 million in corrupt payments termed “referral fees” to employees of state-owned or controlled Chinese entities to secure business.

The Justice Department also alleges that in 2005 Faro employees used an intermediary to pay the bribes to avoid exposure and falsely recorded at least $238,000 in bribes as referral fees.

Faro agreed to pay $1.85 million in disgorgement and interest and to consent to the entry of a cease-and-desist order to settle an action brought by the Securities and Exchange Commission.

DiBianco

The Justice Department and the Securities and Exchange Commission “take a broad view of who constitutes a foreign official in China and assert that employees of state-owned and state-controlled enterprises, even where the entity is operating in a commercial market, are foreign officials,” says Gary DiBianco, a partner in the law firm Skadden, Arps, Slate, Meagher & Flom. “The government is familiar with particular business practices in China and with industries and situations in which demands for improper payments might be made.”

The AGA enforcement action is one of the few FCPA cases involving company liability for independent distributors, according to a Skadden Arps client alert.

DiBianco says companies operating in China should have a compliance program specifically targeted to the risks there. That includes training on the Justice Department’s definition of “foreign official,” pre-hire screening of prospective employees who will be interacting with state enterprises, and rigorous diligence of third-party agents and distributors, he says.

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