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Harry Cassin
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FCPA Release 08-01 Goes The Distance

The first Foreign Corrupt Practices Act Opinion Procedure Release of 2008 is out. It’s the longest Release we know of — just over twelve pages, and packed with details. It tells of a proposed investment in an overseas privatization, a raft of due diligence, tough and prolonged negotiations, yet more due diligence, and a final victory for compliance. The Release shows by its length, dense content and quick turnaround by the Department of Justice — 13 days from Request to Release — the new levels of awareness and effort that characterize modern FCPA compliance. Here’s the short version:

The Players and the Proposed Transaction. The Requestor is a U.S. Fortune 500 company. It sought approval from the DOJ for a majority investment in the Target — a foreign company that manages public services for a major foreign municipality. Compliance complications arose because a private citizen of the host country (the “Foreign Owner”) was the ultimate controlling shareholder of the Target, which he jointly owned with the foreign government. After the Requestor’s investment, the Foreign Owner would eventually buy out the government’s interests. He would also remain a minority owner and enter into a joint venture with the Requestor. Due to his various roles and relationships with the foreign government, the Requestor deemed him to be a “foreign official” for purposes of the FCPA, 15 U.S.C. § 78dd-1(f)(1)(A) — at least until he acquired all of the government’s interests. The foreign government and the Foreign Owner himself disputed his status as a “foreign official,” but the DOJ evidently agreed with the Requestor.

The Problem and the Solution.
When the bids for the privatization were in, the Requestor’s bid valued the potential controlling interest in the Target at a significant premium. Although there was ample commercial support for the valuation, the Requestor became concerned that its payments to the Foreign Owner (as a “foreign official”) could violate the FCPA. Working under tight deadlines imposed by the privatization rules, the Requestor decided to seek an Opinion from the DOJ on an expedited basis. In under two weeks, the DOJ considered the Request and determined that the payments would not violate the FCPA. It based its Opinion on the Requestor’s extensive due diligence, the transparency of the transaction, the commercial valuation of the bid, the undertakings by both the Requestor and the Foreign Owner, and the terms and conditions of the joint venture between them.

The Due Diligence. The Requestor’s due diligence was the most comprehensive yet described in a Release — and we commend it as a useful guide. Here’s the list:

— The Requestor commissioned a report on the Foreign Owner by a reputable international investigative firm.

— The Requestor retained a business consultant in the foreign municipality who provided advice on possible due diligence procedures in the foreign country.

— The Requestor commissioned International Company Profiles on the Target and related entities from the U.S. Commercial Service of the Commerce Department.

— The Requestor searched the names of all relevant persons and entities involved with the transaction from the Target’s side, through the various services and databases accessible to the Requestor’s International Trade Department — including a private due diligence service — to determine that no relevant parties were included on lists of designated or denied persons, terrorist watches, or similar designations.

— The Requestor met with representatives of the U.S. Embassy in the foreign municipality and learned that there were no negative records at the Embassy regarding any party to the proposed transaction.

— Outside counsel conducted due diligence and issued a preliminary report, to be followed by a final report before the closing.

— An outside forensic accounting firm prepared a preliminary due diligence report with a final report to be completed before the closing.

— A second law firm reviewed all of the due diligence.

Transparency. A lack of transparency in the sale of public assets to private parties is a compliance red flag. The Requestor worked hard to satisfy itself that the proposed transaction was known to the relevant authorities and entirely legal under the host country’s laws. Although the Foreign Owner initially objected to any disclosure about his role, the Requestor eventually overcame his objections. Then the Requestor met with numerous officials and lawyers of the foreign government. It received assurances from multiple sources that the proposed transaction — and specifically the Foreign Owner’s role in it — were adequately disclosed and compliant with local law. Only then did the Requestor resume negotiations with the Foreign Owner and perform additional due diligence.

Lessons Learned. A couple of notable features emerge. First, as the full text of the Release makes clear, the Requestor was unrelenting in its due diligence. It ran into obstacles and resistance but worked through them — probably at the risk of offending the Foreign Owner and spoiling the deal. That business risk is present in most proposed overseas joint ventures. There is, unfortunately, something at least mildly insulting about the aggressive due diligence needed under an effective compliance program. Typically, when potential foreign partners perceive an insult and complain, the response is to throttle back the due diligence. Here, though, the Requestor pressed forward with its compliance duties.

Second, the final form of the transaction embodied all the right compliance features. The Foreign Owner represented and warranted that there had been no past violations of antibribery laws, including the FCPA, and that there would be none in the future. He said there were no other foreign officials involved. And crucially, he agreed to include in the joint venture documents potent remedies in case of breach — including termination of the relationship, dissolution of the joint venture company, and a buy-out of the other party’s interests. That’s the unfettered remedial action needed to ensure FCPA compliance in a joint venture. By contrast, an earlier post called The Requestor’s French Dilemma told how the DOJ refused to endorse a proposed overseas joint venture. The problem was that the Requestor could exit only if a compliance breach rose to a “materially adverse” level. The DOJ said,

“Should the Requestor’s inability to extricate itself [from the joint venture] result in the Requestor taking, in the future, acts in furtherance of original acts of bribery by the French company, the Requestor may face liability under the FCPA. Thus, the Department specifically declines to endorse the ‘materially adverse effect’ standard.”

Kudos in this case to the Requestor — for its determination to do a complicated and important foreign transaction and yet comply in all ways with the FCPA. And to the DOJ — for its extraordinary responsiveness in a fast-moving deal. It ran the mile in record time.

View Opinion Procedure Release No. 08-01 (January 15, 2008) Here.

View Prior Posts About Overseas Joint Ventures Here.

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