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FCPA: DOJ and SEC Guidance (Part 2) Parent …

New York Litigation Client Alert DECEMBER 2012. FCPA: DOJ and SEC Guidance ( part 2). Parent - subsidiary and Successor Liability Introduction even absent such involvement, under traditional agency In this second part of our client alert series on the Foreign Corrupt Practices Act ( FCPA ), we focus on A Parent company may only face FCPA liability how companies may face FCPA liability under under an agency theory if the government principles of Parent - subsidiary and successor liability, establishes that an agency relationship exists and we address the steps companies can take to with the subsidiary . To make that showing, the minimize that risk. As in the first part of the series, the DOJ and SEC will evaluate the Parent 's control presentation is based on A Resource Guide to the including the Parent 's knowledge and Foreign Corrupt Practices Act (the Guide ), recently direction of the subsidiary 's actions, both issued by the Department of Justice ( DOJ ) and the generally and in the context of the specific Securities and Exchange Commission ( SEC ).

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Transcription of FCPA: DOJ and SEC Guidance (Part 2) Parent …

1 New York Litigation Client Alert DECEMBER 2012. FCPA: DOJ and SEC Guidance ( part 2). Parent - subsidiary and Successor Liability Introduction even absent such involvement, under traditional agency In this second part of our client alert series on the Foreign Corrupt Practices Act ( FCPA ), we focus on A Parent company may only face FCPA liability how companies may face FCPA liability under under an agency theory if the government principles of Parent - subsidiary and successor liability, establishes that an agency relationship exists and we address the steps companies can take to with the subsidiary . To make that showing, the minimize that risk. As in the first part of the series, the DOJ and SEC will evaluate the Parent 's control presentation is based on A Resource Guide to the including the Parent 's knowledge and Foreign Corrupt Practices Act (the Guide ), recently direction of the subsidiary 's actions, both issued by the Department of Justice ( DOJ ) and the generally and in the context of the specific Securities and Exchange Commission ( SEC ).

2 1. transaction. 4 Although an evaluation of the Parent company's control takes into account the Parent Company- subsidiary Liability formal relationship between the Parent company and its subsidiary , it also looks at the Violation of FCPA's Anti-Bribery Provisions practical realities of the interactions between the two If a subsidiary is acting as an The Guide explains that under the FCPA's anti-bribery agent for its Parent company, the subsidiary 's provisions, a Parent company may be liable for its actions and knowledge are imputed to the subsidiary 's conduct in two ways: (1) if the Parent Parent company is found to have participated sufficiently in the illegal activity, , if it directs the subsidiary to Moreover, the Guide indicates that, if an agency engage in bribery or otherwise directly participates in relationship exists between the Parent company the bribery scheme;2 and (2). and a subsidiary , the Parent company is liable for FCPA violations committed by the 1.

3 CRIM. DIV., DOJ & ENFORCEMENT DIV., SEC, A. RESOURCE GUIDE TO THE FOREIGN CORRUPT PRACTICES. ACT (Nov. 14, 2012). In part 1 of our series, we addressed the violating corporate policy, and an official of the FCPA's jurisdictional reach as reflected in the Guide. Parent company approved a payment to the third- 2 party agent without inquiring as to the payment's See id. at 27. Beyond a Parent corporation's participating directly in, or directing, a subsidiary 's bribery scheme, the justification. See Admin. Proceeding Order, In re Guide does not give any additional insight as to what United Indus. Corp., Exchange Act Release No. constitutes sufficient participation. The Guide cites an 60005 (May 29, 2009), available at http://. example in which the SEC found that a Parent company had 3. sufficient knowledge and control of its subsidiary 's actions so Guide, supra note 1, at 27. 4. as to be liable under the FCPA. Among other things, the See id. 5. subsidiary 's president reported directly to the Parent Id.

4 6. company's CEO, the Parent company approved the See id. (citing Pacific Can Co. v. Hewes, 95 subsidiary 's retention of the third-party agent through whom 42, 46 (9th Cir. 1938), and United States v. NYNEX. the president arranged bribe payments despite such retention Corp., 788 F. Supp. 16, 18 ( 1992)). almaty I ashgabat I astana I buenos aires I dubai I frankfurt I houston I istanbul kuwait city I london I mexico city I milan I muscat I new york I paris I washington, 1. New York Litigation Client Alert DECEMBER 2012. Such liability can exist notwithstanding a issuer use its best efforts to cause the minority- Parent company's lack of actual knowledge, owned subsidiary or affiliate to devise and authorization, or direction. maintain a system of internal accounting controls consistent with the issuer's own Sometimes the government declines to take enforcement obligations under the FCPA. 11 The Guide, action against a Parent company for misconduct of its however, offers no hypotheticals or other insight subsidiary .

5 As reflected in the Guide, no action was into what constitutes best efforts. The Guide taken against a Parent company where, among other only indicates that the government will evaluate things, bribe payments were relatively small, were the issuer's efforts by taking into account all immediately halted upon the Parent company's the circumstances including the relative discovery, were voluntarily reported by the Parent degree of the issuer's ownership of the domestic company to the DOJ and SEC, and where the Parent or foreign firm and the laws and practices company improved its compliance program and internal governing the business operations of the control structure to safeguard against further country in which such firm is located.' 12 With wrongdoing by the such limited Guidance , it remains unclear whether and under what circumstances Violation of FCPA's Books and Records Provisions misstatements in the books and records of a minority-owned subsidiary may potentially The FCPA requires issuers ( and foreign public subject an issuer to FCPA liability.)

6 Companies listed on stock exchanges or required to file periodic reports with the SEC) to make and keep Successor Liability books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and The applicability of successor liability to a dispositions of the assets of the issuer. 9 The issuer's particular corporate transaction depends on the responsibility to maintain accurate books and records facts and the applicable state, federal, and extends to the books and records of the subsidiaries and foreign law. 13 As a general legal matter, when affiliates under its control, including foreign a company merges with or acquires another Thus, a subsidiary 's misstated financial company, the successor company assumes the records may potentially result in an FCPA books and predecessor company's liabilities, with such records violation for its Parent company. successor liability applying in both civil and criminal Principles of successor Unfortunately, the Guide does not clarify a Parent liability apply as well to FCPA violations.

7 Company's duties with respect to subsidiaries and Notably, however, the Guide confirms that a affiliates that are not under the Parent company's successor company is not exposed to FCPA. control, , where the Parent company owns less than a 50% controlling interest in the subsidiary or affiliate. 11. See id. (emphasis added). The Guide equates best The Guide interprets the statute as requiring that the efforts with the FCPA's requirement that an issuer that owns less than 50% of a subsidiary proceed in good faith to use its influence to cause the 7. Guide, supra note 1, at 27. subsidiary or affiliate to devise accounting controls 8. See id. at 78. similar to those required of the issuer. 15 . 9. 15 78m(b)(2)(A). The term reasonable detail is 78m(b)(6). 12. defined as such level of detail and degree of assurance as See Guide, supra note 1, at 43 (quoting 15 . would satisfy prudent officials in the conduct of their own 78m(b)(6)). 13. affairs. 78m(b)(7). Guide, supra note 1, at 28.

8 10 14. See Guide, supra note 1, at 43. See id. almaty I ashgabat I astana I buenos aires I dubai I frankfurt I houston I istanbul kuwait city I london I mexico city I milan I muscat I new york I paris I washington, 2. New York Litigation Client Alert DECEMBER 2012. liability if the DOJ and SEC had no jurisdiction over the departments review the target company's sales predecessor company's pre-acquisition and financial data, customer contracts, and This would be pertinent with respect to mergers with or third-party agreements; performing a risk-based acquisitions of foreign entities, provided there was no analysis of the target company's customers;. prohibited conduct within the United States or by a auditing a random selection of the target person. company's transactions; and speaking with the target company's management regarding Even where there has been a violation, an enforcement corruption risks and compliance action is not always initiated against a successor company.

9 It is here that the Guide is particularly useful, If pre-acquisition due diligence reveals that the as it provides a detailed discussion of the types of pre- target company has engaged in corrupt conduct, and post-acquisition conduct that the government the acquiring company should require the target expects from companies engaging in mergers and company, as a condition to the acquisition, to acquisitions, and presents examples of circumstances in report pre-acquisition Such which such companies can avoid, or anticipate, FCPA reporting should shield the successor from enforcement action. FCPA liability, while the target company will likely face an enforcement Pre-Acquisition Conduct by Acquiring Company The Guide also discusses an acquiring As a starting point, the government encourages company's utilization of the DOJ's opinion companies to conduct extensive risk-based FCPA and procedure to obtain pre-acquisition assurances anti-corruption pre-acquisition due The that it will not face DOJ prosecution for a target Guide identifies four benefits from such diligence: the company's pre-acquisition FCPA enhanced ability to value properly a target company, the This option, however, has limited utility for ability to negotiate potential investigation and most companies,23 and the Guide acknowledges remediation responsibilities, the likely reduction of the risk that the acquired company will continue its corrupt 19.

10 See id. activity, and the tangible demonstration that the 20. See id. successor company has a genuine commitment to 21. See id. at 29; see also Compl., SEC v. Syncor Int'l uncovering and preventing FCPA Corp., No. 02-cv-2421 ( Dec. 10, 2002), ECF. No. 1, available at The Guide suggests that the aim of pre-acquisition due ; SEC v. Syncor Int'l diligence should be to determine whether the target Corp., SEC Lit. Rel. 17997 (Dec. 10, 2002), available at company has appropriate anti-corruption and compliance policies in place, whether its employees are (discussing acquisition target's settlement with the adequately trained regarding such policies, whether the SEC). policies are followed, and what remedial action is taken 22. See Guide, supra note 1, at 86. Under the DOJ. if the policies are Adequate pre-acquisition opinion procedure, companies and foreign due diligence may include: having the acquiring issuers can submit information as to proposed company's legal, accounting, and compliance conduct to the DOJ and receive an opinion, within 30.


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