Foreign Corrupt Practices Act (FCPA)

Foreign Corrupt Practices Act, FCPA, Case for Operational Diligence, Operational Due DiligenceThe government has high expectations when it comes to a US company buying another company that has operations overseas. In short FCPA makes it illegal for a US company to bride foreign officials to retain or obtain business.

If the government believes there have been improprieties then the cost for a company to defend itself can run into the millions of dollars easily as the forensic accountants and lawyers work to answer the government inquiries.

Once a US company buys another company with foreign operations it becomes responsible for all that companies activities including those that historically may have been conducted illegally under the FCPA.

The actual deal transaction can also lead to complications. When the subject of restructuring comes up, dealing with Unions or Work Councils is a negotiation which could put the deal on a slippery slope of offering a deal if the foreign entity will agree to terms. Since bribery is an act that implies money of gift giving is offered to alter the behavior of the recipient one must be careful in the proceedings.

The only way to protect yourself is a robust due diligence. Most companies use an army of highly paid lawyers to review business contracts looking for signs of FCPA violations, which is necessary but should not be the only means of uncovering possible risks. FCPA violations can happen, and more often do happen, at a local operational level when “corporate legal” was not consulted on the business contract.  Using Operational Personal to performing a through Operational Diligence is prudent given the down side risk.

Operational Personal will be talking to the local managers that may operate more autonomously then their headquarters may think. I did a diligence with a division of a large global company that was doing business with a “state-owned” client that insisted on limited accounting paperwork.  Not a violation per se but certainly a risk that should be addressed should the deal close.

With a Master Degree in International Relations I can tell you that in some cultures the “cost of doing business” would be considered a “bribe” in other cultures. The risk is higher when historically deals in counties such as Russia, Thailand, Indonesia, China and Mexico are being considered.

Operational Diligence should be performed to uncover local contract issues, issues with local internal accounting control, and it can uncover other operational areas of concerns such as a lack of proper screening of partners, contractors and employees at the local level.