November 2008
DOJ Confirms Appropriateness of Risk-Based
FCPA Transactional Due Diligence
If you have any questions regarding the matters discussed in this
memorandum, please contact the
following attorneys or call your
regular Skadden contact.
Gary DiBianco
Washington, D.C.
202.371.7858
gary.dibianco@skadden.com
Colleen P. Mahoney
Washington, D.C.
202.371.7900
colleen.mahoney@skadden.com
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This memorandum is provided by
Skadden, Arps, Slate, Meagher &
Flom LLP and its affiliates for
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purposes only and is not intended
and should not be construed as
legal advice. This memorandum
is considered advertising under
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n an FCPA Opinion Release issued in June 2008, the Department of Justice
addressed a request from Halliburton Company (Halliburton) regarding anticorruption due diligence procedures and voluntary disclosures in the context of
a proposed acquisition. In seeking the Opinion Release, Halliburton stated that it had
limited pre-closing access to the Target, a United Kingdom-based oil and gas products and services company, because the transaction was being conducted through an
auction. Although (pursuant to DOJ regulation) the FCPA Opinion Release may not
be relied upon by any party other than Halliburton, it nevertheless provides helpful
guidance for pre- and post-closing transactional FCPA due diligence. The Opinion
Release confirms that a risk-based approach to due diligence, and focus on high risk
sales, relationships and government interactions is appropriate. As to the process for
conducting diligence, the Opinion Release confirms the use of methods that have
become standard practice, including forensic accounting review and management
interviews. The Opinion Release also provides a road map of steps that can be taken
post-closing when pre-closing due diligence is not possible. Importantly, the specific post-closing disclosure obligations agreed to by Halliburton are onerous:
Halliburton agreed to full disclosure of any FCPA, books and records, or internal
controls issues identified during the diligence. Absent special circumstances, a company
conducting pre-closing anti-corruption due diligence likely would not voluntarily
subject itself to such disclosure obligations.
Risk Level of the Transaction. In light of prior settlements and ongoing investigations
in the Target’s industry (oil and gas products and services), and the locations in which
the Target does business (particularly Africa, the Middle East, Asia, the former Soviet
Union and South America), the transaction had a fairly high risk profile. Halliburton
itself has disclosed the existence of an ongoing FCPA investigation in connection with
payments to Nigerian officials, contributing to the risk profile of the transaction.
Due Diligence Areas of Focus. Halliburton agreed to provide to the DOJ a comprehensive, risk-based FCPA and anti-corruption due diligence work plan within ten
days of closing. The work plan – which could include input from the DOJ and would
be revised to target any specific issues uncovered – would address:
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Relationships
with distributors, sales agents, consultants and other third parties who
may be used to facilitate improper payments;
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Commercial dealings with state-owned customers;
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Joint venture, teaming or consortium arrangements;
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Customs and immigration issues;
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Tax issues; and
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Government licenses and permits.
Halliburton agreed to conduct the diligence in stages, focusing first on high-risk
issues (within 90 days after closing), then medium risk (within 120 days after closing),
and then low-risk issues (within 180 days after closing).
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These substantive diligence areas generally track accepted best practices that, in turn,
have evolved based on FCPA settlement agreements, prior Opinion Releases and
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public statements made by the DOJ. In particular, a number of recent settlements have alleged
improper payments through third parties, contractors or consultants, and the issue has arisen both in
the context of securing sales and in contracting for administrative services. See, e.g., United States
v. Monsanto Company (Docket No. 1:05cr8) (D.D.C. 2005)(involving Indonesian consultant); United
States v. Titan Corp., No. 05 CR 0314-BEN (S.D. Cal. 2005)(involving payments to President of
Benin’s business advisor); United States v. Statoil ASA, No. 06-cr-00960-RJH-1 (S.D.N.Y. 2006)
(involving a Turks & Caicos consulting firm); United States v. Baker Hughes Services International
Inc., Case No. H-cr-07-129 (S.D. Tex. 2007)(involving payments to agents in Kazakhstan).
Similarly, recent settlements have illustrated that a target whose revenues rely primarily on large nonU.S. government contracts presents the specific risk of traditional payments to obtain business. See,
e.g., DOJ Press Release No. 08-116, Westinghouse Air Brake Technologies Corporation Agrees To
Pay $300,000 Penalty To Resolve Foreign Bribery Violations In India (Feb. 14, 2008)(alleged cash
payments to improper cash payments to Indian government officials to obtain railroad contracts);
United States v. Willbros Group, Inc. and Willbros International, Inc., 08-CR-287 (S.D. Tex. May 14,
2008)(alleged payments to Nigerian and Ecuadorian officials to obtain oil and natural gas pipeline
contracts); DOJ Press Release No. 08-505, Faro Technologies Inc. Agrees To Pay $1.1 Million
Penalty and Enter Non-Prosecution Agreement for FCPA Violations (June 5, 2008)(alleged improper
payments disguised as referral fees to Chinese officials to obtain government contracts).
The DOJ also has focused on the use of improper payments to obtain preferential treatment during the
customs process or to reduce tax liability. See, e.g., In the Matter of Baker Hughes Incorporated,
Admin. Proc. File No. 3-10572, Sec. Ex. Act. Rel. No. 44784 (September 12, 2001)(alleged $75,000
payment to an Indonesian tax official to reduce the tax assessment against the Company’s Indonesian
subsidiary); United States v. Kay, 359 F.3d 738 (5th Cir. 2004)(alleged payments by officers of American
Rice, Inc. to Haitian officials to reduce sales taxes and customs duties); United States. v. ABB Vetco
Gray, Inc., No. CR H-04-279 (S.D. Tex. 2004)(alleged payments to Nigerian customs officials); In the
Matter of BJ Services Company, Admin. Proc. File No. 3-11427, Sec. Ex. Act Rel. No. 49390 (March
10, 2004)(alleged payments to Argentinean customs officials to overlook customs violations).
Finally, payments to obtain government licenses or permits have been the subject of recent government enforcement actions. United States of America v. AGA Medical Corp., No. 0:08-CR-00172-1
(D. Minn., June 3, 2008)(alleged payments to Chinese officials to cause the China Patent Office to
approve AGA’s patent applications); Delta & Pine Land Company, No. 1:07-CV-01352 (D.D.C., July
25, 2007)(alleged payments to officials of the Turkish Ministry of Agricultural and Rural Affairs in
order to obtain governmental certifications); The Dow Chemical Co., No. 07-CV-00336 (D.D.C., Feb.
13, 2007)(alleged payments and gifts to officials of the Indian Central Insecticides Board to ensure
registration and inspection).
Due Diligence Process. The Opinion Release specifies that Halliburton’s post-closing due diligence
process would include a review of Target’s relevant financial and accounting records, followed by
interviews of relevant Target personnel and other individuals. Halliburton agreed to retain outside
counsel and third-party consultants, including forensic accountants, to conduct these procedures.
The Opinion Release further notes that review of e-mail accounts of Target personnel would be
included in the due diligence procedures. This is an enhancement to standard pre-closing due diligence procedures, which generally do not include e-mail collection and review. More commonly,
such review is conducted only after a specific issue for targeted investigation is identified. Given
that the diligence described would be conducted after acquisition, Halliburton may have concluded
that e-mail review would be appropriate since it would have full access to personnel e-mail accounts.
In pre-closing due diligence scenarios, a potential acquiror simply may not have access to e-mail
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accounts. In situations where review of a Target’s e-mail accounts is deemed important, a practical
solution may be to conduct certain procedures pre-closing, and additional procedures — such as
review of e-mail — post-closing.
Reporting Obligations. In obtaining the Opinion Release, Halliburton represented that it would disclose to the DOJ, immediately following closing, any information learned pre-closing that suggested
FCPA, corruption or related internal controls or accounting issues exist or existed at Target. The
Company further stated that it would report to the DOJ the results of its high-risk due diligence within
90 days, middle-risk due diligence within 120 days, and low-risk due diligence within 180 days.
Halliburton represented that it would provide periodic progress reports to the DOJ and would disclose
to the DOJ all FCPA, internal controls and accounting issues identified during due diligence. Halliburton
agreed to complete additional reviews as might be required by the DOJ within one year of closing, and
to provide periodic reports to the DOJ. These reporting obligations are unusual and fairly burdensome. As a general matter during pre-closing due diligence, an acquiring company conducts the due
diligence confidentially and carefully weighs the advantages and risks of voluntary disclosure of any
issues that might be identified.
Additional Provisions. Halliburton also agreed to certain ongoing compliance steps that have been a
standard requirement of recent DOJ FCPA settlements. These actions highlight the DOJ’s expectation of “day one” compliance. First, with regard to anti-corruption compliance policies, Halliburton
represented that upon closing, it would immediately apply its Code of Ethics and anti-corruption
policies and procedures to the Target, through appropriate communications and expedited training of
Target employees. Second, Halliburton agreed to enhance compliance regarding any third party
retained by the Target. Specifically, Halliburton agreed that it would sign, as soon as commercially
reasonable, new contracts — rather than contract amendments or extensions — with third parties who
will continue to work for Target post-closing. These agreements would include appropriate FCPA
and anti-corruption representations and warranties and audit rights. Similarly, Halliburton agreed to
terminate agents and other third parties who will not continue to work for Target post-closing. If
Halliburton identifies FCPA or corruption-related issues, it must take appropriate personnel actions
and suspend third-party relationships.
The expectations of “day one” compliance after the closing of a deal highlight that an acquiror should
consider the business risk associated with bringing a company into compliance with the FCPA, especially
where historic corruption controls have been limited. In addition to risks raised by past conduct, an
acquiror should assess whether imposing necessary compliance programs will affect the target’s business model or operation resulting in a loss of sales, licenses or similarly valuable assets.
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