Dealing With JV Compliance Takes Varsity Skills

If compliance officers had any doubts about the long reach of U.S. regulatory interest in joint ventures with overseas partners, the Justice Department's recent action again Marubeni Corp. should erase them.

In January the Justice Department announced a deferred-prosecution agreement and $54.6 million in fines against Marubeni Corp., a Japanese trading company, for funneling bribes to government officials in Nigeria who were working as part of a multi-national joint venture to develop a liquefied natural gas plant in that country.

Marubeni was only one junior partner in that joint venture and the latest in a long list of corporate characters mired in FCPA charges stemming from it. KBR (formerly Kellogg, Brown & Root) was another, which had also settled FCPA charges with a $402 million fine. So was Tenchip SA of France, which paid $338 million in fines to U.S. regulators in 2010

The largest stakeholder was the government-owned Nigerian National Petroleum Corp., which owned 49 percent of the venture.

Joint ventures are a good thing. They provide resource and market access, manufacturing footprint, and local talent. In countries that require foreign entrants to link arms with a local partner, they're unavoidable. But as Marubeni, KBR, and Tenchip demonstrated—as well as RAE Systems and Watts Water Technologies, which have also stumbled into corruption cases thanks to joint ventures—the costs of inattention on foreign shores can be high.

Corporate conduct at joint ventures and in foreign subsidiaries is a topic that's “coming to the forefront for a lot of boards and a lot of management teams,” says Brian Christensen, head of global internal audit and financial controls at consulting firm Protiviti. Historically, JVs were mostly the domains of mining and industry. Now partnerships (either via a joint venture, alliance, or preferred-partner agreement) are increasingly the norm; as a result, corporate boards are, as Christensen puts it, working on “defining what a JV means in a world that's become a much smaller place.”

The Sarbanes-Oxley Act and other reforms of the last decade have sharpened corporate leaders' attention to enterprise risk overall, and that has elevated the awareness of joint venture risks along with it, Christensen says. “There's an increased dialogue within boardrooms and management teams to make sure agreements meet the level of expectations that they have set for themselves in recent years,” he says.

As the Marubeni case illustrates, owning a small portion of the joint venture is a weak indicator of responsibility in the eyes of the law. Ed Rial, who leads Deloitte's FCPA consulting practice, says a minority interest—but one with substantial board representation, the right to appoint the CEO, or the right to veto or appoint key management—can certainly face severe consequences for misconduct.

“It's not clear cut,” Rial says.

And in the court of public opinion, ownership doesn't matter at all. Consider the outcry after the New York Times wrote about the working conditions at Chinese manufacturing giant Foxconn. Opprobrium didn't fall onto Foxconn as much as it did to Apple Inc., which uses Foxconn to churn out millions of iPhones and iPads annually. That outcry led to countless follow-on stories, has absorbed Apple CEO Tim Cook's time, and led to Apple's hiring of independent watchdog group the Fair Labor Association to audit Foxconn's Chinese factories.

Such attention has reverberated widely, says Larry Parsons, vice president of business conduct and ethics at Freescale Semiconductor, which has subsidiaries in more than 20 countries. Freescale, whose semiconductors are in all manner of consumer, industrial, and automotive electronics, is fielding more customer requests for site audits on environmental, labor, social and governance issues—four so far in 2012 alone, Parsons says.

“The message from leadership, that we'd rather not have that business than have to get it improperly, is always critical.”

—Edward Rial,

Principal, Forensic & Dispute Services,

Deloitte Financial Advisory Services

The concern isn't so much passing muster in workplace safety, worker well-being, or environmental stewardship, as it is having employees support the two-day visits to conduct the audits, and having answers ready for the diversity of questions raised, he says.

So what's a firm venturing to, and operating on, distant shores to do? Three main things, experts say.

Due diligence. Increasingly, Ronald Reagan's maxim “Trust, but verify,” holds true for joint venture arrangements. This is best done before contracts have been signed, says lawyer Jeff Kaplan, a partner with Kaplan & Walker. It means researching the partner organization and the important individuals in it, and their relationships with foreign governments. The good news: This is not necessarily a one-size-fits-all process; a Canadian venture generally demands less scrutiny than a Chinese one.

Parsons says he puts particular focus on the places “where corruption tends to find more welcoming environments due to culture, reputation or past experience.” Third parties—agents or other representatives of the company—are a particular focus, he says. Thomas Fox, an independent legal consultant and blogger on the FCPA and ethics, says companies that don't like what they see in these initial stages should walk away.

In setting up a venture, Fox adds, the overseas partner must be willing to institute a compliance program that passes muster under FCPA, the U.K. Bribery Act, or other laws that may apply. “Because enforcement has been so strong over the past few years, most savvy foreign businessmen understand that U.S. companies absolutely have to do this,” Fox says. And if they don't, he adds, U.S. companies should reconsider whether they want to do business with those people.

Careful Setup. Once into the relationship, setting up a proper compliance regime involves several steps that reach into the heart of the joint venture: staffing, makeup and operation of the board, delegation of authority, and establishment of audit rights, to name a few, Kaplan says. Where corruption is a real risk, demand board super-majorities for the approval of major outlays or political contributions, Kaplan says. Fox suggests prohibiting bribery and other corruption explicitly, as well as clear termination and recoupment rights. The assignment of local legal advisers and auditors also plays into this process, adds Christensen.

MARUBENI CASE DETAILS

In the following excerpt, the Justice Department explains the details of Marubeni Corp.'s actions to resolve the Foreign Corrupt Practices Act investigation.

Marubeni Corporation has agreed to pay a $54.6 million criminal penalty to resolve charges related to the Foreign Corrupt Practices Act (FCPA) for its participation in a decade-long scheme to bribe Nigerian government officials to obtain engineering, procurement and construction (EPC) contracts, the Justice Department's Criminal Division announced today.

The department filed a deferred prosecution agreement and a criminal information today against Marubeni in U.S. District Court for the Southern District of Texas. The two-count information charges Marubeni with one count of conspiracy and one count of aiding and abetting violations of the FCPA. Marubeni is a Japanese trading company headquartered in Tokyo…

… Under the terms of the deferred prosecution agreement, the department agreed to defer prosecution of Marubeni for two years. Marubeni agreed to retain a corporate compliance consultant for a term of two years to review the design and implementation of its compliance program, to enhance its compliance program to ensure that it satisfies certain standards and to cooperate with the department in ongoing investigations. If Marubeni abides by the terms of the deferred prosecution agreement, the department will dismiss the criminal information when the term of the agreement expires.

“With today's resolution, the department has held accountable all five of the corporations that participated in the massive, decade-long scheme to bribe Nigerian government officials in connection with the so-called Bonny Island project,” said Mythili Raman, Principal Deputy Assistant Attorney General of the Justice Department's Criminal Division. “As a result of this extensive investigation, the department and our partners have obtained more than $1.7 billion in penalties and forfeiture orders from the joint venture partners, their agents and individuals who sought illegally to obtain the Bonny Island contracts. Several individuals also have pleaded guilty for their roles in the scheme. Our FCPA enforcement efforts are an essential part of our comprehensive approach to rooting out corruption across the globe.”

In a related criminal case, KBR's successor company, Kellogg Brown & Root LLC, pleaded guilty in February 2009 to FCPA-related charges for its participation in the scheme to bribe Nigerian government officials. Kellogg Brown & Root LLC was ordered to pay a $402 million fine and to retain an independent compliance monitor for a three-year period to review the design and implementation of its compliance program. In another related criminal case, the department filed a deferred prosecution agreement and criminal information against Technip in June 2010. According to that agreement, Technip agreed to pay a $240 million criminal penalty and to retain an independent compliance monitor for two years. In July 2010, the department filed a deferred prosecution agreement and criminal information against Snamprogetti, which also agreed to pay a $240 million criminal penalty. In April 2011, the department filed a deferred prosecution agreement and criminal information against JGC, in which JGC agreed to pay a $218.8 million criminal penalty and to retain an independent compliance consultant for two years.

Source: Justice Department.

Parsons says he establishes avenues through which employees can report and escalate issues—and makes clear his expectation that issues will be reported. A corporate ethics office with a senior person involved is important so that, as Parsons puts it, “when things get outside of someone's comfort level, things happen.”

Ongoing Maintenance. This is about executing on the compliance plan, and it's the hard part. Sustaining compliance involves overcoming two major cultural obstacles.

The first is overcoming norms in which, say, greasing the palm of a planning-committee member is standard practice. “How do you get a bunch of Chinese employees, who have never been a part of a U.S. company and English is not their first language, to buy into this whole thing?” Fox says.

The second is more about human nature. Joint ventures are “corporate marriages of convenience,” as Kaplan puts it. “The average JV hasn't been around for a long time. It doesn't have a culture that can help. It may not have an auditor, it probably doesn't have a compliance officer, it doesn't have a lot of processes,” he says. “People aren't as loyal to it as they would be to their company.”

Training, both formal and informal, is critical here, Parsons says. For example, all employees joining Freescale go through a code-of-conduct course. Some go deeper, taking International Traffic in Arms Regulations and other, more specific ethics-and-compliance training as needed. Parsons said the company has found success using short, humorous case-study videos available online, which entertain while keeping compliance on employees' minds.

Rial says overseas financial people and auditors need job-specific training, including what controls to watch out for and how to identify shaky payment approvals. There's often no bright line, he says; in some cultures, for example, gift-giving is a tradition and cultural norm, and not an attempt to gain influence.

Parsons has cultivated relationships with a network of HR, procurement, and corporate-assurance employees across the company. When he travels, he sits down with them, talks ethics and compliance and, he says, notes concerns that invariably come up. More formal avenues for reporting are also needed, Rial says, such that questionable activities come to light and can be tackled—or sanctioned—quickly.

Generally, Rial says, those in distant joint ventures welcome the ethical and legal certitude these steps bring.

“They want to be compliant and think they can do their jobs well without having to suggest that improper payments might be available,” Rial says. “The message from leadership, that we'd rather not have that business than have to get it improperly, is always critical.”