How a little due diligence can save millions

As many multinational companies have learned the hard way, Foreign Corrupt Practices Act (FCPA) investigations can be expensive. Once regulators set their sights on investigating an overseas transaction, a company can spend millions defending itself as lawyers and forensic accountants scramble on behalf of the company to meet the government’s high expectations for a credible investigation.

The FCPA, which makes it illegal for a company subject to US laws to bribe foreign officials to obtain or retain business, no matter where in the world that company does business, is a particular concern during an international merger or acquisition. When a US company buys another company with overseas operations, it may be liable for the target company’s illegal activity — not only in the future, but also past violations.

“Once they’re yours, they’re yours,” says John Cunningham, a corporate compliance and white collar defense lawyer in Baker & McKenzie’s Washington DC office. “Companies put themselves at significant risk if they don’t conduct robust due diligence prior to an acquisition.”

With FCPA investigations on the rise, it’s never been more important for companies to seek this type of legal counsel from a law firm with a global reach and insider perspective. Baker & McKenzie has five former federal prosecutors in its Washington DC office, who collaborate with colleagues around the world to tackle these cases.

Their government experience, coupled with the firm’s longstanding presence in regions with a higher risk of corruption, such as China, Thailand, Ukraine, Indonesia and Russia, enables Baker & McKenzie to handle these matters economically and efficiently.

“As a former prosecutor, you know how regulators think and what they look for during an investigation,” says Cunningham, who spent four years at the Department of Justice. “You know the threshold of evidence that prosecutors need to bring a successful case, which enables you, as compliance counsel, to create a blueprint to uncover problems quickly and address them by order of priority.”

In a recent case, Baker & McKenzie created such a blueprint for a global financial services client interested in buying a US-based company with operations in Asia, Europe and the Middle East. The client wanted to close the deal within its fiscal year, giving the firm just six weeks to complete a due diligence exercise that typically takes three to six months. Almost immediately, red flags were raised.

“Within the first phone call on this particular project, we knew there were big problems,” says Cunningham, who worked on the risk assessment team with partner Brian Whisler, another former federal prosecutor.

During the assessment, the team uncovered numerous compliance risks: for example, the target company did a lot of business with state-owned or controlled customers, failed to conduct background checks on business associates, and kept poor accounting records.

Under the FCPA, any employee of a government-owned or managed company can be considered a “foreign official.” When acquiring a company that does business with many state-controlled entities, the acquirer is automatically at much greater risk of violating the FCPA. Transactions with these customers must be closely monitored to ensure they do not include kickbacks or other illegal payments.

The team also found that the target company did little screening of its partners, suppliers, and local agents for criminal backgrounds, money laundering histories, or improper associations with government agencies (for example, undisclosed family relationships with high-ranking foreign officials). And it lacked adequate internal accounting controls to ensure its transactions were booked properly — another FCPA requirement.

In six short weeks, the Baker & McKenzie team reviewed over 300 contracts, ran dozens of background checks, and conducted countless phone interviews with target company executives and overseas employees to produce a series of reports identifying the low, medium and high risk areas. The conclusion: the client could proceed with the acquisition but would need to take some serious remedial action.

Drawing on years of experience with corruption cases, the team created a year-long remediation plan to fix the biggest problems, including rewriting contracts with local agents to include anti-corruption warranties and instating stricter accounting practices.

“Whenever we can shut down potential improprieties on the front end through the due diligence process, we’re doing the client a big service,” Cunningham says.

Because of the success of the due diligence plan, the client could close the deal by its deadline without exposing itself unnecessarily to FCPA prosecution. This may have saved millions in potential defense fees, along with the bad publicity that typically accompanies a government investigation. Perhaps more importantly, the team’s work gave the client a solid foundation for fully integrating the acquired company and establishing a framework for future FCPA compliance.