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Parental controls: anti-corruption compliance programs for joint ventures, subsidiaries and franchisees (Part 1)

Due to the strict liability approach governing the FCPA’s accounting provisions, public companies generally include majority-owned subsidiaries in their anti-corruption compliance programs. But what is the best compliance governance approach for other “parent-child” contexts?

In this eight-part series of posts, we will explore this issue from various perspectives.

First, the most useful lesson dating back to 2001, does not involve an FCPA prosecution. It is based on the then-famous — now largely forgotten — TAP case, involving a fraud-and-abuse prosecution of TAP Pharmaceutical Products Inc., a joint venture that was 50-50 owned by two large pharmaceutical companies.

As was described in various presentations made at compliance and ethics conferences at the time, due to the lack of majority ownership by the two “parents,” neither of them viewed compliance in the joint venture (JV) as their responsibility.

Unfortunately, while both were correct from a narrow legal perspective (in that liability did not pass from the JV to either parent), from an economic point of view they should have done more to protect their JV investment –- as the parents each ultimately bore half of the JV’s total loss, of which the fines alone were $875 million.

JVs seem to be more common now than at any time before, although that is a difficult thing to measure. This is due in part to companies expanding operations into countries where (as a practical and/or legal matter) they need a local partner and, to a lesser extent, to the “asset-light” strategies of some corporations.

The issues of what and how much a parent company should do to promote compliance in its joint ventures has risen in significance with this trend, particularly with JVs in emerging markets, which often have compliance challenges.

Compliance and ethics controls can be a challenge for JVs for a host of reasons. JVs are often a corporate marriage of convenience between two or more partners with a specific goal or goals in mind, such as expanding into a new geography, new market or new product, but undertaken with little focus on compliance issues.  

There is often an insufficient focus on culture, the compliance and ethics process and the staffing of important compliance functions, including legal, audit and human resources, to ensure a robust approach to compliance.


Jeffrey M. Kaplan and Rebecca Walker are partners in Kaplan & Walker LLP.

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