Digging Down on Joint Ventures and FCPA Compliance

jv2The FCPA is a broad statute.  As written, it covers a number of situations, and creates twists and turns in analysis.

One of the more challenging areas to navigate is the issue of joint ventures.

When you bring two companies together to operate jointly, there are a number of difficult issues to analyze.

First, assuming there is an adequate business justification for a joint venture with a specific partner, the company has to conduct a due diligence review of the JV partner.

The due diligence process should be built on similar principles to those involving third parties.  The procedure should be robust, documented and address all potential risks involved.

Second, assuming the due diligence identifies certain risks, the joint venture agreement itself must include appropriate provisions governing anti-corruption compliance.  This is where some interesting twists and turns can occur.

If this is a China JV with a state-owned enterprise, the issues become even more complex.  The interactions between the company and the China SOE within the joint venture itself have to be regulated so that they are not perceived as intended to improperly influence the China SOE (either directly or in other areas of interaction).

If the JV involves a private JV partner, the compliance issue then boils down to controlling the actions of the JV sales people, JV staff responsible for regulatory interactions, and JV-retained third party agents and distributors.

As you can see, the JV itself has created a new set of risks for the company.  The tricky issue boils down to creating a compliance program that addresses these risks. In the JV context, the company has, by definition, less control.  As a result, these issues need to be addressed in the formation of the JV.jv5

The issue becomes even more difficult when the company entering into the JV has less than 50 percent control.  You can imagine all of the permutations that can arise with multiple owners, one or more of whom are SOEs, and the variety of JV configurations.

JV risks can be divided into internal and external risks.  If the JV partner is a state-owned enterprise, the company has internal and external risks.  If the JV is with a private company, the company has external risks.

The situation can become even more complicated when the JV partner’s related company – sister company or parent company is allegedly involved (or was involved) in corrupt conduct.   For example, if the JV partner’s company is under scrutiny for alleged FCPA violations in a situation totally outside the JV, the issue has to be addressed by the company.

jvThis is where the due diligence process comes into play.  A company that learns of corruption issues involving a company related to its JV partner has to renew its due diligence review of the JV partner.  This increased risk has to be addressed.  The company may have to secure increased contractual certifications, representations and warranties from its JV partner, and/or insist on other remedial measures to minimize its risk exposure.

In this situation, the company has to insist on updating the JV partner’s due diligence, and implement enhanced controls, which may include: additional anti-corruption training, auditing, supplementary contractual certifications, compliance reminders, and other affirmative steps designed to reduce the risk.

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