The Department of Justice (DOJ) has issued two Foreign Corrupt Practices Act (FCPA) Opinion Procedure Releases (Opinion Releases) this year – Opinion Releases 10-02 and 10-03 – that provide guidance with respect to the types of due diligence and controls companies should consider with respect to third-party business relationships in foreign business contexts where the circumstances indicate corruption risk.1 Opinion Release 10- 02 concerns due diligence and controls in the context of a charitable grant to a foreign entity, but the types of safeguards discussed in this Opinion Release are also applicable in standard commercial settings, such as foreign partnerships or investments. Opinion Release 10-02 also addresses safeguards that may, depending on the circumstances, preserve the legitimacy of a transaction even if due diligence efforts uncover ties between the foreign business partner (or recipient of aid, in the case of Opinion Release 10-02) and a foreign official. For its part, Opinion Release 10-03 concerns the employment of a consultant whose activities could render them a foreign official within the meaning of the FCPA, and thus provides guidance with respect to the conditions under which a business relationship with a foreign official may actually be permissible.
The Requestor in Opinion Release 10-02 was a U.S. micro-finance institution (MFI) that received grants to support low-income entrepreneurs. One of the MFI’s subsidiaries was a Eurasian Subsidiary that sought to change its status to that of a commercial bank. As a condition to obtaining its bank license, local regulators insisted that the Eurasian Subsidiary divest 33% of its grant capital to a Local MFI (out of a list of six) to guarantee that a certain percentage of its funds would remain “localized.” The Requestor was concerned that a compelled grant to a Local MFI from a list designated by the foreign government could run afoul of the FCPA. As a result, the European Subsidiary engaged in due diligence of the Local MFIs and negotiated a system of controls on the use of grant funds.
The Requestor conducted three stages of due diligence. First, the Requestor screened the six Local MFIs using public information and third party sources. This screening ruled out three of the six candidates as unqualified to receive the funds and put them to effective use. Thus, the initial screening was analogous to the type of initial screening that might be conducted to determine that a potential foreign business partner is a legitimate business organization. Second, the Requestor examined the remaining organizations’ ownership, management structure, and operations, by reviewing key organizational documents and interviewing representatives of each of the organizations to identify relationships with foreign government and elicit information about potential corruption risk. As a result, two of the three remaining potential grant recipients were eliminated; one for a conflict of interest, one for discovery of a previously undisclosed ownership change.
Third, the Requestor obtained additional information about the officers, directors and owners of the Local MFI and its parent entity; analyzed whether any family members of officers, directors or employees were government officials; performed internet searches and searches of other news sources to determine whether the organization had faced any criminal prosecutions or investigations; assessed the organization’s reputation for integrity, including persons affiliated with the entity; met with representatives of the Local MFI and its parent to learn about each organization’s ownership and control, and interviewed references; and confirmed that the Local MFI was willing to comply with anticorruption provisions and controls.
The last round of due diligence uncovered that one of the board members of both the Local MFI and its parent organization was a sitting government official in the Eurasian country and that other board members were former government officials. However, the Requestor determined that this sitting government official served in a capacity that was “completely unrelated” to the microfinancing industry. Also, local law prohibited sitting government officials to be compensated for this type of board service under the laws of this Eurasian country, and the Local MFI confirmed that its own board members and those of its parent were not compensated for their board service. Finally, the proposed written grant agreement expressly prohibited the Local MFI from transferring any of the grant funds to the parent or otherwise using the grant funds to compensate board members.
The full list of controls that the Requestor proposed to ensure that the grant money would not be used to corruptly influence a foreign official included: (1) staggered payment of grant funds; (2) ongoing monitoring and auditing; (3) earmarking of funds for capacity-building; (4) a prohibition on the compensation of board members; and (5) institution of an anti-corruption compliance program.
The controls adopted in Opinion Release 10-02, where a foreign official was a board member of the foreign entity receiving funds from the Requestor, sought to ensure that funds did not reach the pockets of a foreign official and that the foreign official who was a Board Member of the foreign business entity receiving funds did not use his position to benefit the Requestor. Opinion Release 10-03 concerns conditions under which the DOJ concluded it permissible to pay an individual to represent the Requestor in transactions with a foreign government even though this individual at other times performed services on behalf of the foreign government and therefore might be deemed to be a “foreign official.”
More specifically, Opinion Release 10-03 concerned a U.S. company that wished to hire a consultant to assist the company in obtaining a natural resources development contract with the foreign government. The U.S. consultant is a registered agent of a foreign government and has previously held and currently holds contracts to represent the foreign government in that capacity. As a result, the Requestor proposed to put in place controls with respect to employment of the consultant that are the same types of controls that prior DOJ Opinion Releases have identified as rendering permissible, on the specific facts presented, a business transaction with a foreign official holding a formal government post. DOJ noted that “there are situations in which the Consultant has and will act on behalf of the foreign government, which could in certain circumstances render the Consultant and its employees ‘foreign officials’ for purposes of the FCPA.” For purposes of the consulting relationship proposed in Opinion Release 10-03, however, the DOJ found that the consultant was not a foreign official. The DOJ found that “the steps taken to wall off the employees working on the various representations from each other, the full disclosure of the relationships to the relevant parties, the permissibility of the relationships under local law, and the contractual obligations to limit further representation of the foreign government by the consultant . . . are sufficient to ensure that the consultant will not be acting on behalf of the foreign government in performing the consulting contract with the [U.S. Company].”2
The types of due diligence and safeguards undertaken by the Requestors in Opinion Releases 10-02 and 10-03 are consistent with the types of measures that a company may consider adopting in a variety of foreign business transactions and relationships. Appropriate due diligence inquiries may include: identify the name and corporate structure of the foreign business partner; understand the existing business conducted by the foreign business partner; obtain and review organizational documents, identify the officers, directors, and/or shareholders of proposed partner; seek information as to whether any such persons or their family members are foreign officials; assess the credentials of the proposed partner; obtain and review copies of financial statements; obtain information about the foreign business partner’s anti-corruption compliance policies, if any; obtain and check references; conduct background checks; review information from public databases, or purchase access to information available from proprietary databases; review media reports; obtain legal opinions as necessary with respect to lawfulness of the transaction under the law of the jurisdiction; and interview the proposed business partner or representatives thereof with respect to any circumstances relevant to corruption risk.
Of course, determining exactly which measures to pursue, and how to assess information obtained and its consequences with respect to corruption risk, will be a very fact-specific endeavor. Reasonable risk mitigation does not require that all of these steps be conducted in every situation; conversely, additional or simply different steps may be appropriate based on the specific circumstances.
Similarly, when it comes to the issue of what anticorruption measures should be undertaken, the answer will vary depending on the circumstances. Fundamentally, however, the controls undertaken in both Opinion Release 10-02 (the charitable grant context, which is analogous to the foreign business partner context) and Opinion Release 10-03 (employment of someone deemed to be a foreign official), reflect core principles that payments in a foreign business relationship should be tracked, monitored, and controlled to ensure that they are not used to corruptly influence a foreign official; payments should be legal under local law; payments should be reasonable as to amount; payments should be transparent; anti-corruption policies should be in place and relevant affirmations or warranties should be obtained; and steps should be taken to ensure, in the rare circumstance where a business dealing with a foreign official is contemplated, that the official does not use his/her position to benefit the company.
In sum, DOJ’s recent 2010 Opinion Releases underscore the importance of establishing an appropriate due diligence process in undertaking foreign business relationships, and provide guidance as to the types of due diligence inquiries and anticorruption controls that may be called for depending on the circumstances.