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Richard L. Cassin
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Julie DiMauro
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Shruti J. Shah
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Russell A. Stamets
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Richard Bistrong
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Eric Carlson
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Bill Steinman
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Business Down, Compliance Risks Up

When times are tough and markets shrink, new international joint ventures sprout up everywhere. They’re a fast and inexpensive way to expand commercial reach. JVs formed out of economic necessity often bring together companies that in good times are competitors. So their concerns about the arrangements usually focus on competitive risks, such as exposing their proprietary plans, customers lists, intellectual property and key personnel to potential poachers.

But another joint venture-related risk is compliance with the Foreign Corrupt Practices Act. Companies new to joint venturing may not understand how easily their overseas partners’ illegal practices can be imputed to them. More ominously, companies facing financial flak might take intentional risks for the sake of survival. The law, they convince themselves, doesn’t really mean what it says. Joint venture partners, after all, are beyond their control and therefore beyond their legal responsibility. That’s not true, of course. But when backed into a financial corner, priorities can shift — with tragic results.

Compliance is never easy, and in bad times it’s harder than ever. Potential partners, for example, may be evaluated only for their effectiveness, without regard to their reliability. So what’s needed to police joint ventures? The steps below are minimum requirements for an effective compliance program — in good times and bad:

Due Diligence. Take all necessary and prudent precautions through well-documented due diligence to ensure that business relationships are formed only with reputable and qualified joint venture partners.

Board or Management Reviews. Examine the suitability of all prospective joint venture partners for purposes of compliance with the Foreign Corrupt Practices Act. Review the adequacy of due diligence performed in connection with the selection of overseas partners, as well as the joint venture’s selection of agents, subcontractors and consultants for business development outside the United States. Reviewers should not be subordinate to the most senior officer of the Company’s department or unit responsible for the relevant transaction.

Compliance Obligations in the Joint Venture Documents. Include in all joint venture agreements representations and undertakings by the joint venture partners, with periodic re-certifications, that no payments of money or anything of value have been or will be offered, promised or paid, directly or indirectly, to any foreign officials, political parties, party officials, or candidates for public or political party office, to influence the acts of such officials, political parties, party officials, or candidates in their official capacity, to induce them to use their influence with a government or an instrumentality thereof to obtain or retain business or gain an improper advantage in connection with any business venture or contract in which the Company is a participant

Audits and Approvals. Retain audit rights over the joint venture. Agree with all partners that the joint venture will not hire an ­agent, subcontractor or consultant without the Company’s prior written consent (to be based on adequate due diligence).

Right to Terminate. Make sure all joint venture documents allow for immediate and unfettered termination for any breach of compliance-related obligations.

View other posts about joint ventures here.

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1 Comment

  1. So are improper payments more likely in a boom period or a bust period? It would seem that in a boom period, there are quantitatively more deals and transactions overall, which would suggest that the number of corrupt deals and transactions similarly increases.


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