Walmart’s Debacle – What PE Firms Can Learn
By Donald Klaskin
The recent allegations against Wal-Mart that the company engaged in bribery to assist in its expansion efforts illuminates the great challenges facing multinational companies transacting overseas. Tyson Foods, Diageo, IBM and Pfizer have been alleged to violate the Foreign Corrupt Practices Act (FCPA). And while these larger corporations have been subject to scrutiny, the Department of Justice is sure to be taking a closer look at smaller companies too as it ramps up its effort to clean its international house. Needless to say, companies of all sizes must take the appropriate prudent measures to ensure operations abroad are in compliance with the FCPA guidelines. It is critical that companies take a proactive approach and not wait for government authorities to come knocking at their door. Perhaps the Wal-Mart situation will highlight how imperative it is for investors to make sure they have adequate compliance programs in place.
The FCPA does not just apply to large publicly traded companies but to all companies whether public or private. If you are a VC or a large buyout firm investing in a company outside the borders of the USA, you need to know that any improper payments to government officials to facilitate in obtaining or keeping business is unlawful. The FCPA is putting a halt to the bribery of foreign officials in order to restore public confidence in the integrity of the American business system. From a layman’s standpoint, specifically, the FCPA applies to any individual, firm, officer, director, stockholder, employee or agent of a firm acting on behalf of a firm and U.S. parent corporations may be held liable for the acts of foreign subsidiaries where they authorized, directed or controlled the activity in question.
Be aware that in addition to the bribery element of the FCPA there is also an accounting component, which is often much easier for the government to prove that the bribe or gift was improperly recorded on the books of the company. The government is also not opposed to going after individual employees of a company as a deterrent to future violations.
While some PE firms seek to go global, they need to take seriously the FCPA when making an investment in a foreign entity. It is important that private equity investors evaluate a portfolio company’s vulnerability to violations US law. An assessment of the firm’s FCPA risk profile should include consideration of the company’s respective industry and the level of government regulation, its use of third parties (such as agents or distributors), the risks raised by its customer base (e.g. sales to governments entities such as hospitals or schools), and whether the investment target does business in countries with a reputation for bribery or corruption.
If a possible FCPA red flag arises during the due diligence process, it should be fully investigated and if it is determined that the portfolio company has violated the FCPA, investors must make important determinations including an assessment of the severity of the violation and the potential for the violation to generate an enforcement action.
Accordingly, due diligence should encompass more than a perfunctory review of the portfolio company’s financial statements, and should incorporate a comprehensive due diligence plan including, but not limited to the following:
1. Verification of corporate records to confirm ownership of the company, officers, directors as well as its legal status and good standing within the respective country, state or region, in which they are located/operate
2. Clear understanding of the portfolio company’s network of business partnerships or affiliations
3. On-site visit to validate the portfolio company’s business operations
4. Criminal history checks with appropriate agencies and publicly available records of the portfolio company’s principals and senior management
5. Review of the portfolio company’s financial history, tax liabilities, revenue reporting
6. Media review (with searches of both local language and English-language press)
7. Inquiries to identify any relationship of the portfolio company’s principals and senior management with governmental or political figures/families
8. Review of regulatory concerns (including HR issues) to ensure the portfolio company is compliant with local laws and regulations
As the DOJ and SEC’s anti-corruption enforcement efforts continue to cast large corporations under an unforgiving glare, it is critical for companies with transnational operations to take FCPA enforcement seriously. Taking a proactive approach and reviewing your company’s current anti-bribery policy is fundamental to minimize your company’s risk exposure. While some industries carry an inherently higher risk for FCPA violations, no industry is immune from FCPA enforcement.
A robust compliance program can embody a valuable corporate asset to enhance day-to-day business operations while also mitigating reputational and monetary damages when and if a violation should occur.