The world of international compliance: what transactional lawyers need to know to perform ethically and responsibly.

I. INTRODUCTION II. FCPA, EXPORT COMPLIANCE, AND HUMAN

RIGHTS ISSUES: A POCKET GUIDE

A. Overview of the FCPA

B. Overview of Export Controls and Trade Sanctions

C. Overview of Alien Tort Statute III. COMPLIANCE RISK DUE DILIGENCE

A. Risk Assessment

1. FCPA: Look for Red Flags

2. Export Compliance Assessment: Who is Doing

What?

3. ATS Risk Assessment: Understand the Political

and Social Context

B. Conduct a Tailored Review

C. Post-Review Steps IV. CONCLUSION

I. INTRODUCTION

Recent enforcement has shown that conducting thorough transactional due diligence on compliance issues is a strategic necessity for transactional lawyers. Failure to perform due diligence on Foreign Corrupt Practices Act (FCPA), (1) export controls, and Alien Tort Statute (ATS) (2) matters can derail a transaction and destroy the reputations of those involved.

The defunct merger between Lockheed Martin and Titan Corporation illustrates the transactional risks raised by compliance issues. In the course of its due diligence for the proposed merger, Lockheed Martin uncovered evidence of FCPA violations by Titan, a military intelligence and communications contractor. The violations included approximately $2 million in bribes and illegal political contributions to the re-election campaign of the president of Benin, improper payments to agents in various countries, books and records violations, and internal controls deficiencies. (3) The uncovered violations were disclosed to the government, and Lockheed Martin renegotiated the deal to lower the acquisition price by $200 million. (4) The transaction ultimately was called off when a deal with law enforcement authorities could not be reached by the date of the shareholder vote to approve the acquisition. (5)

On March 1, 2005, Titan was sentenced to the largest FCPA penalty in history: a combined $28 million civil and criminal fine, three years probation, adoption of a strict compliance program, and external compliance monitoring. (6) Titan could have avoided this outcome had it devised and maintained a stronger compliance program before the proposed merger. Instead, the lack of such a program led to severe government penalties and a collapsed transaction. The Titan outcome has spurred a heightened interest and focus on compliance-related due diligence in corporate mergers, acquisitions, and other transactions.

This paper will focus on the key compliance issues every transactional lawyer should be aware of when conducting due diligence on a target company prior to a joint venture, agreement or acquisition. Section II will discuss the FCPA, export compliance, and ATS issues that every transactional lawyer needs to consider when pursuing opportunities abroad. Section III will explore the risk factors raised by these issues and will outline preventive and corrective actions that should be implemented to mitigate these compliance risks.

II. FCPA, EXPORT COMPLIANCE, AND HUMAN RIGHTS ISSUES: A POCKET GUIDE

A. Overview of the FCPA

The FCPA consists of two key sections: the antibribery provisions and the accounting provisions. (7) The antibribery provisions prohibit U.S. persons and entities, as well as individuals or organizations working on their behalf, from bribing or attempting to bribe foreign officials in order to obtain or retain a business benefit. (8) A bribe can consist of any thing of value, including cash or a cash equivalent, loans or business opportunities, charitable donations, travel expenses, gifts, labor contracts, and golf outings or other entertainment unrelated to customary entertainment connected with a particular deal or contract. (9) Moreover, offers or promises, even if no payment is actually made, may nonetheless be actionable under the FCPA. (10)

A "foreign official" is any officer or employee of a foreign government or any department, agency, or instrumentality thereof, including customs or tax officials (11) and employees of state-owned enterprises. (12) Employees of PEMEX (Mexico), PETRONAS (Malaysia), SOCAR (Azerbaijan), and SONANGOL (Angola), for example, are all foreign officials under the FCPA. Employees or officials of public international organizations are also considered foreign officials, as well as members of royal families and others exercising official authority, albeit outside an official government role. (13)

Under the FCPA, a company may also be liable for bribes paid by its third-party representatives, agents, or consultants. (14) The bribe or attempted bribe must be knowing, which includes, in addition to actual knowledge, conscious disregard of, willful blindness to, or deliberate ignorance of facts that put a company on notice that its agent, consultant, or representative may commit a violation. (15) Several factors, such as a country's reputation for corruption or a customer's request for over-invoicing, may constitute "red flags," putting a company on notice that its agent may commit a violation. (16)

In the Titan complaint, for example, the SEC accused the company of making payments to an agent in Benin without performing any meaningful due diligence into the background of the agent, and for ignoring red flags, such as evidence of a close relationship between the agent and the President of Benin. (17) Under these circumstances, the company was liable for bribe payments made by the agent to the President of Benin in the form of campaign contributions. (18)

The accounting provisions of the FCPA require issuers (19) to meet certain standards regarding their accounting practices, books and records, and internal controls. Specifically, a company and its subsidiaries must keep its books, records, and accounts in reasonable detail to accurately and fairly reflect transactions and dispositions of assets, and to devise and maintain appropriate internal accounting controls. (20) The provisions expressly apply only to issuers, but the SEC has taken the view that they also apply to any affiliate whose financial results are incorporated into the consolidated financial statements of the issuer. (21)

The accounting provisions are more widely prosecuted than the antibribery provisions because they are easier to prove. Any intentional inaccurate recording of a payment may constitute a violation even if the government does not prove that the payment was a bribe. (22) For example, a facilitation payment to an official for granting a permit that is recorded as "fees for licenses" (23) may constitute a violation. In Titan, the SEC alleged that Titan's failure to adopt and maintain an FCPA compliance program, conduct adequate due diligence before hiring foreign agents, and conduct FCPA due diligence prior to making an acquisition collectively constituted internal control deficiencies, which gave rise to a claim of failing to devise and maintain a system of internal accounting controls. (24)

B. Overview of Export Controls and Trade Sanctions

United States export controls laws are aimed at controlling sensitive goods and technologies to protect and promote U.S. national security, U.S. foreign policy, and U.S. economic interests. Preacquisition due diligence relating to compliance with export controls laws can be especially important because an acquiring company may be strictly liable for the target's violations and may incur significant penalties, such as civil and criminal prosecution, fines, and loss of export privileges. (25) The two primary enforcement agencies are the United States Department of Commerce, Bureau of Industry and Security (BIS) and the United States Department of Treasury, Office of Foreign Assets Control (OFAC). (26)

BIS's mission is to promote legitimate international trade and to implement and enforce controls over commercial goods (so-called dual-use items) under the Export Administration Regulations (EAR). (27) BIS conducted hundreds of investigations during the 2005 fiscal year, resulting in thirty-one criminal convictions and civil and criminal penalties totaling over $14.5 million. (28) Dual-use items subject to the EAR include most commercial products, such as computer hardware and software, electronics, vehicles, chemicals, and mechanical equipment. (29) BIS controls may apply whenever an export or commercial transaction involves sensitive, advanced, new or next generation technologies or products. (30)

"Export" means the actual shipment or transmission of an item subject to the EAR out of the United States or the release of technology or software subject to the EAR to a foreign national. (31) An item is subject to the EAR if it is physically located in the United States, a U.S. origin item, made from U.S. technology, or a foreign-made item containing U.S. parts and components (subject to certain de minimis exceptions). (32) The method of transport, transmission, or disclosure is irrelevant. (33)