A U.S.-based company that intends to buy a foreign company that paid bribes to government officials prior to the acquisition taking place won't face prosecution under the Foreign Corrupt Practices Act, the Department of Justice said in its second FCPA advisory opinion of 2014.

A somewhat rare citing that should be of interest to companies following anti-bribery enforcement actions, FCPA opinion procedures allow U.S. companies to get the Attorney General's opinion on whether certain conduct is in line with the Justice Department's enforcement policy regarding the FCPA's anti-bribery provisions. Opinion Releases can only be relied upon by the requestor and have no binding application to any other companies.

In the latest opinion procedure, dated Nov. 7, the requestor intends to acquire a foreign consumer products company and its wholly-owned subsidiary. In preparing for the acquisition, the requestor retained a forensic accounting firm to carry out a due diligence review aimed at identifying, among other things, potential legal and compliance concerns at the target company.

The review consequently identified a number of potential improper payments made by the target company to government officials of the foreign country. Specifically, after reviewing about 1,300 transactions with a total value of $12.9 million, the accounting firm identified over $100,000 in transactions that appeared to involve bribes to government officials in exchange for permits and licenses.

Other transactions involved gifts and cash donations to government officials, charitable contributions and sponsorships, and payments to members of the state-controlled media to minimize negative publicity. None of the bribery occurred in the United States and none were made by or through a U.S. person or issuer.

Accounting Weaknesses

The review also uncovered substantial accounting and recordkeeping weaknesses. According to the opinion procedure:

The vast majority of the cash payments and gifts to government officials and the charitable contributions were not supported by documentary records;

Expenses were improperly and inaccurately classified, making many of them impossible to locate;

The company did not develop or implement a written code of conduct or other compliance policies and procedures; and

Employees of the target company didn’t appear to have an adequate understanding or awareness of anti-bribery laws and regulations.

In light of the bribery and accounting and recordkeeping deficiencies, the requestor has set forth a plan that includes remedial pre-acquisition measures prior to the planned closing in 2015. These remedial measures include risk mitigation; dissemination and training with regard to compliance procedures and policies; standardization of business relationships with third parties; and formalization of the target company’s accounting and record-keeping in accordance with requestor’s policies and applicable law.

Department’s Analysis

Citing the FCPA Resource Guide, the Justice Department noted that the United States does not have jurisdiction over bribery that occurred by a foreign company prior to its acquisition by a U.S. company. According to the FCPA Guide, “if an issuer were to acquire a foreign company that was not previously subject to the FCPA’s jurisdiction, the mere acquisition of that foreign company would not retroactively create FCPA liability for the acquiring issuer.”

In this case, none of the payments occurred in the United States, and the requestor did not identify participation by any U.S. person or issuer in the payments. The requestor also represented that it had not acquired any contracts or other assets through bribery that would remain in operation and from which it would derive financial benefit following the acquisition.

The Justice Department said it would, thus, lack jurisdiction under the FCPA to prosecute the requestor for improper payments made by the seller or the target company prior to the acquisition.

“The circumstances of each corporate merger or acquisition are unique and require specifically tailored due diligence and integration processes,” the Justice Department stated. “Hence, the exact timeline and appropriateness of particular aspects of requestor’s integration of the target company are not necessarily suitable to other situations.”

For other companies that engage in mergers and acquisitions, the Justice Department offers the following advice:

Conduct thorough risk-based FCPA and anti-corruption due diligence; Implement the acquiring company’s code of conduct and anti-corruption policies as quickly as practicable;

Conduct FCPA and other relevant anti-corruption training for the acquired entity’s directors and employees, as well as third-party agents and partners;

Conduct an FCPA-specific audit of the acquired entity as quickly as practicable; and

Disclose to the Justice Department any corrupt payments discovered during the due diligence process.

FCPA opinion requests, which can help shed some light on the Justice Department’s interpretation of the statute and give companies some comfort that they won't find themselves in the Justice Department's crosshairs, are relatively rare. Only 39 have been issued since 1993.

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