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On November 7, the DOJ released its second FCPA Opinion Procedure Release of 2014. The Release addressed an inquiry by a consumer products company, which is publicly-traded on a U.S. stock exchange. The company is planning to acquire a foreign target – also in the consumer products business – that is majority-owned by a foreign seller, both of which do business almost exclusively in the same foreign country. The target has had negligible business contacts in the United States. During preacquisition due diligence, the company hired an experienced forensic accounting firm to review around 1,300 transactions with a combined value of approximately USD 12.9 million. The review identified several compliance red flags, affecting over USD 100,000 of all transactions reviewed (i.e., around 8 percent). The red flags included payments to foreign government officials for permits and licenses, cash and gift donations, suspicious charitable contributions, etc. None of the suspicious payments had any connection to the United States. The due diligence also identified serious accounting and internal controls deficiencies at the target. For example, most of the improper payments lacked documentary backup and the target company’s employees appeared unaware of anti-bribery laws and regulations. Despite these problematic findings, the company plans to move forward with the acquisition. It also put together an integration plan aimed at remediating the problems uncovered during due diligence. The company plans to complete the integration plan within one year of closing the acquisition.

What the DOJ Said

Based on the facts provided to it, the DOJ Release indicated that it would not pursue an enforcement action based on the target’s preacquisition violations of the FCPA. Within the DOJ’s analysis, are several key points:

  • No retroactive liability – echoing its comments in the 2012 Resource Guide to the FCPA, the DOJ confirmed that liability cannot arise where it did not exist before. In other words, the DOJ lacked jurisdiction over the target’s conduct before, and this does not change merely because the target is acquired by a company subject to FCPA jurisdiction.
  • Tainted asset liability – the DOJ noted that the target did not have any active “contracts or other assets … acquired through bribery that would remain in operation” and financially benefit the company. Here, the DOJ is referring to the ‘tainted asset’ theory – i.e., liability can arise when a company knowingly benefits from a contract obtained through illegal conduct. The argument is that a portion of the total purchase price for the target constitutes reimbursement for bribes the target paid to acquire the asset. The DOJ and SEC have not applied the tainted asset theory in past enforcement actions, but the DOJ did touch on it in Opinion Procedure Release 01-01.
  • No comment on integration plan – as in the past, the DOJ avoided commenting on mixed commercial/legal issues, in this case the company’s integration plan and remedial measures for the target. This was probably disappointing for the company as it could be liable for any post-acquisition activity of the target – i.e., leaving it exposed for one year while it completes the integration plan.
  • Reiteration of basic compliance steps – the DOJ also repeated the basic steps that, in its view, all companies should take in acquiring a target: (i) due diligence; (ii) implement compliance program as quickly as practicable; (iii) compliance training for target directors/employees and third parties; (iv) conduct FCPA-specific audit of target as quickly as practicable; and (v) disclose to DOJ any improper payments discovered during due diligence.

Main Takeaways

The DOJ Release is timely in light of the recent increase in M&A activity. That said, the Release did not address new issues or shed new light on old issues. Still, the Release should serve as a useful reminder to companies considering an acquisition that discovering improper payments or accounting and internal controls deficiencies during due diligence does not have to be a ‘deal killer’. Indeed, past improper conduct may not impose any liability on an acquiring company if the target lacks sufficient contacts to the United States. Similarly, the Release’s comments on tainted assets suggest that an acquiring company could reduce its potential liability from contracts the target obtained through bribery by ‘carving’ them out of the acquisition. Finally, even though the DOJ did not address what an adequate integration plan looks like, acquiring companies should not interpret this to mean that DOJ has some secret formula it is unwilling to share. Generally, an acquiring company should have some written integration plan, which is reasonable given the target’s risk profile, and that the acquiring company actually implements. Although opinions differ as to the details of the plan, an acquiring company will have a strong case if it can show that its plan met these three basic criteria.  


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