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Use It Or Lose It

We always enjoy it when Pete from DC drops by the blog. He’s a veteran compliance professional and thinks deep thoughts about the Foreign Corrupt Practices Act. Lately, he told us, he’s been thinking about audit rights — the kind mentioned in our recent post about joint ventures.

Compliance-minded companies, we wrote, make sure they have the right to audit any international joint venture they’re part of. It’s a basic tool for checking the JV’s conduct. If there’s even a hint of corrupt behavior, the company can use the audit to learn what’s happening, and then respond. We also think the threat of audit scrutiny deters illegal conduct in a joint venture.

But, asks Pete, are audit rights always a good idea? What if you have them and don’t use them — perhaps because digging into the books and records of the JV might offend your partner? Will the unused audit rights expose you to more peril from the Foreign Corrupt Practices Act than not having the audit rights to begin with?

Along those same lines, some companies even say they don’t want an FCPA compliance program at all — not because they intend to violate the law, but because they’re afraid they won’t consistently do everything their program requires. Lax administration, they reason, would aggravate their problems should an offense happen, because the feds might interpret their sloppy housekeeping as evidence of intent to break the law all along.

We don’t know any cases that answer the question and neither does Pete. But a Justice Department Opinion Procedure Release is helpful. It’s Release 2001-01 from May 24, 2001. We wrote about it last year in a post called The Requestor’s French Dilemma.

The Requestor in the Release was a U.S. company forming a joint venture with a French partner. There were doubts about how the French partner landed some of its contracts, so the Requestor kept the right to terminate the JV if the French partner breached the compliance warranty. But the right to terminate only kicked in if the breach caused a “material adverse effect” on the JV’s business.

The Justice Department wouldn’t endorse the termination clause. The “material adverse effect” threshold, the DOJ said, could result in the Requestor being stuck in a JV that was violating the FCPA but not doing doing material harm to its business. (In fact, a bribe that violates the FCPA by obtaining or retaining business would help the JV, at least until the DOJ or another regulator throws the book at it.) The DOJ said if the Requestor couldn’t exit the JV unconditionally after a compliance breach, then continuing in the partnership could constitute “acts in furtherance of original acts of bribery by the French company, [for which] the Requestor may face liability under the FCPA.”

What does the Requestor’s French dilemma mean? That joint venture-compliance has to be proactive. A company can’t let itself become a passive participant in FCPA offenses — including those caused by a partner, agent or other intermediary. Having, and using, audit rights are a proactive way to determine for certain whether a joint venture is complying with the FCPA. And determining if there’s a compliance problem is the first step to avoiding liability for it.

We could add arguments and illustrations from the Federal Sentencing Guidelines, the DOJ’s Criminal Resource Manual for U.S. Attorneys, numerous deferred and non-prosecution agreements, and other Opinion Procedure Releases. But here’s the bottom line: An active approach to compliance — in a joint venture or otherwise — is always the better option. An effective compliance program requires audit rights for international joint ventures and the exercise of those rights when necessary.

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