//by: Joseph Spinelli, Chief Operating Officer, Daylight Forensic & Advisory

I believe it is fair to say that no discussion regarding FCPA Due Diligence in Mergers & Acquisitions would be complete without first addressing DOl’s recent Opinion Releases on this subject. The Department of Justice (DOl) via its Foreign Corrupt Practices Act (FCPA) Opinion Release Procedure, recently provided guidance on two vital issues 2 facing companies conducting business overseas. On June 13, 2008, DOJ issued Opinion Procedure Release 08-02 in which it set forth the due diligence measures that Halliburton Company would be required to adhere to in order to avoid potential FCPA liability for the activities of its acquisition target, Expro International Group, PLC.

On July 11, 2008, DOJ addressed whether a company could make certain payments to Chinese journalists who are employees of state – owned agencies as part of reasonable expenses incurred in promoting the company’s products and services.

Opinion Procedure Release No. 008-02 Pre-Acquisition FCPA Due Diligence

With regard to Opinion Release No. 0802- Pre-Acquisition FCPA Due Diligence, the Halliburton Company, in seeking to acquire the assets of Expro a UK company on the London Stock Exchange (The Target) that provides well flow management for the oil and gas industry, correctly determined that it needed to conduct extensive FCPA due diligence, because Expro operates in a high-risk industry, in high-risk countries and deals directly with government owned customers. Halliburton sought to condition its bid for Expro on the satisfactory completion ofFCPA due diligence or the pre-closing remediation of any problems discovered during the due diligence process. Under UK law, however, Expro was not required to entertain a conditional bid where it had already received a non-conditional bid.

In order to proceed, Halliburton needed to make an unconditional bid for Expro, but it also needed to protect itself from assuming potential FCPA liability for Expro’s activities prior to its being purchased. DOJ stated that Halliburton could resolve this quandary by making the following representations:

1. If Halliburton’s unconditional bid is accepted by Expro, immediately after closing the deal Halliburton has to meet with DOJ and disclose information in its possession that “suggests that any FCPA corruption or related internal controls or accounting issues exist or existed at the Target.”
2. Ten days later Halliburton is required to provide DOJ with “a comprehensive, risk-based FCPA and anti-corruption due diligence work plan which will address, among other things, the use of agents and other third parties; commercial dealings with state-owned customers; any joint venture, teaming or consortium arrangements; customs and immigration matters; tax matters; and any government licenses and permits. Such work plan will organize the due diligence effort into high risk, medium risk, and lowest risk elements;
3. Within 90 days, report to the DOl on the high-risk due diligence; within 120 days report on the medium risk due diligence; and within 180 days, report on the low-risk due diligence.
4. Halliburton will effectuate remedial action including suspension and termination of any agents or other parties that have Ft.PA or other 10 anti-corruption problems. In addition, those agents and their parties who will continue to be associated with the new enterprise will be required to sign new contracts with Halliburton that include among other things, FCPA and other anticorruption representations and warranties, audit rights and termination clauses;
5. Halliburton’s Code of Conduct will be implemented at Expro and FCPA training of all relevant Expro employees will be provided, and
6. Expro will be maintained as a wholly owned subsidiary for “so long as the Department is investigating any conduct by [Expro] or any of its officers, directors, employees, agents, subsidiaries and affiliates.”

DOJ also maintained the manner in which Halliburton is required to satisfy its due diligence obligations, stating: Halliburton will retain external counsel and third-party consultants, including forensic accountants, as well as utilize internal resources, as appropriate, to conduct the FCPA and anti- corruption due diligence. The due diligence process shall include, under all appropriate circumstances and in all appropriate locations,examination of relevant Expro records, including e-mail review and review of company financial and accounting records as well as interviews of relevant Expro personnel and other individuals.

Opinion Procedure Release No. 008-03 Reasonable Promotional Expenses

In this Release, DOJ opined on whether it is permissible to pay Chinese journalists to cover a company’s news stories. In the People’s Republic of China most journalists work for state owned enterprises (SOEs), and therefore are deemed “foreign officials” pursuant to the FCPA. Trace International, a consultant addressing anti-corruption issues, asked DOJ to opine as to whether a company, using strict controls, could pay Chinese journalists’ expenses incurred in connection with covering a company’s news event. DOl stated that such payments would qualify as promotional expenses that are an affirmative defense to an FCPA charge if: the expenses were reasonable and directly related to the promotion demonstration, or explanation of the company’s products or services. In reaching this opinion, DOl noted that it placed no weight on the fact that such payments may be a common practice in the People’s Republic of China.

“The Department of Justice has sent a clear message: companies must conduct robust FCPA due diligence in connection with mergers, acquisitions, joint ventures and even stock offerings by companies.”

When coupled with Opinion Release 0802, this release further illustrates DOl’s recognition of the practical realities of doing business in certain parts of the world, and the need to establish and follow procedures that respect foreign law restrictions while complying with the FCPA. Officials of DOJ have sent a clear and consistent message, and that is companies must conduct robust FCPA due diligence in connection with mergers, acquisitions, joint ventures and even stock offerings by companies. The standards established in Releases 08-02 and 008-03 are a watershed mark in this area and go a long way to “codifying” the positions taken by DOl officials in their speeches and statements to the media. Companies must proactively review their FCPA Compliance Program to ensure that their due diligence plan with respect to all their third party relationships and transactions comports with DOl’s statements. Companies should make certain that they have conducted and documented an enterprise wide risk assessment that reviews their FCPA risk as it relates to their products and services, customers, third-party relationships and geographic locations in which they conduct business.

Some Risk Assessment questions I believe that must be asked to determine if your company is at risk of FCPA violations are as follows:

1. Is your company considered an “issuer” (a corporation that has issued securities that have been registered in the United States or who is required to file periodic reports with the SEC.), or “domestic concern” (any individual who is a citizen, national, or resident of the United Sates, or any corporation, partnerships, association, joint-stock company, business trust, unincorporated organization, or sole proprietorships that has its principal place of business in the United States, or is organized under the laws of a state of the United States or a territory, possession, or commonwealth of the United States)?
2. Are there any suspicions of FCPA violations within the company? Pleading ignorance is not a valid defense and will often result in costly resolution of any issues identified by DOJ or the SEC.
3. Does your company have an anti corruption policy that specifically addresses FCPA concerns with business conducted internationally?
4. Is periodic monitoring of compliance with FCPA policies conducted?
5. Have employees who are directly or indirectly responsible for international operations been trained on FCPA issues?
6. Are bribes historically and culturally acceptable in countries where your company conducts business?
7. Does your company use third party agents, consultants, intermediaries, or distributors when performing business internationally?
8. Does your due diligence process scrutinize the appropriateness of entities and individuals involved in securing or retaining international contracts on your behalf?
9. Does your company provide goods or services for foreign governments?
10. Do your employees interact with foreign officials (customs agents, government employees, and local political officials) when conducting business overseas?
11. Is your company doing business in high risk FCl’A industries such as defense, telecommunications, oil and gas, pharmaceuticals, or manufacturing?
12. Is your company doing business in high-risk countries, such as Brazil, Russia, India, China, Korea, Mexico, Nigeria, Afghanistan, Venezuela or the United Arab Emirates?

Ok, so we have now conducted our Enterprise Wide Risk Assessment, and it has been determined that the company might have FCPA exposure risk. Here are some of the steps to mitigate the risk and avoid increased liability:

1. Formulate an internal FCPA Compliance Committee that should consist of key managers to monitor the assessment process and ensure all objectives are implemented.
2. An inventory should be made to determine where the company is in terms of formalized FCPA policies and procedures, and let this help guide the next steps.
3. Focus your efforts on reviewing the company’s international operations and determine the area at greatest risk for FCPA violations. As previously stated, the company should conduct an assessment of all types of transactions and l or business operations occurring internationally, the business culture of each country in which these international activities occur and the integrity and reputation of third parties engaged on behalf of the company.
4. When your FCPA Risk Assessment is completed, an incisive investigation should be conducted of any suspected violations and high risk areas of concern, and a preliminary investigative work plan should be prepared.

Let me conclude by conceding that FCPA Compliance for can be an expensive undertaking and the addition of vendor risk ranking and screening procedures will only add to the sticker price. However, there are tangible economic benefits to be realized from performing FCPA due diligence on third parties and intermediaries. The fines, disgorgement of ill gotten gains and drop in market capitalization resulting from a company having been implicated in an FCPA enforcement action can result in closer government scrutiny including the imposition of a court appointed monitor, which the company has to fund for a period of several years.