Cloudy With a Strong Chance of FCPA: How to Forecast International Deals

Chinese, Indian and Latin American companies are increasingly on PE and VC firms’ radar and can offer intriguing opportunities to expand investment horizons and achieve strong ROIs. Experienced cross-border investors know there are issues that can arise, from situations as simple as language barriers and differing social customs to the more complex problems, like bribery, fraud and compliance with the Foreign Corrupt Practices Act.

When looking at a cross-border deal, it is critical to know the background and reputation of the individuals operating the business. While public record data is often limited in certain countries overseas, it is imperative to understand those limitations and have access to appropriate domestic investigative resources that can gather necessary intelligence on the management and owners of a company. Key issues to look for in these background searches are: identifying other professional interests of the officers that may pose a conflict; any whispers of criminal behavior or unethical professional relationships; controversial media attention that may bring unwanted negative publicity to the firm; and other types of information that would impact the success of your investment. It is also prudent to check out joint venture partners, key vendors and other agents or third parties that engage in regular business transactions with the target company. These affiliations, too, can pose a threat to your investment.

U.S. investors and companies with multinational operations need to be aware of the expansive scope of the Foreign Corrupt Practices Act (FCPA), which has become the U.S. Justice Department’s flavor of the decade. The FCPA prohibits bribery of any foreign official, regardless of rank or position, which has been broadly interpreted to include any payments that have a business nexus and give a competitive advantage. Third parties acting on behalf of such entities are also subject to the FCPA—which means beware your affiliates and contracted representatives.

Earlier this month, Lindsey Manufacturing Co., based in California, and two of its senior officers were found guilty of violating FCPA regs when securing contracts in Mexico. This is the first time a company and its officers were tried and found guilty of FCPA violations (violations of the FCPA have historically resulted in settlement agreements and did not go to trial). There is a similar lawsuit currently involving Control Components Inc.: the U.S.-based company and its officers have been charged by the DOJ with bribing officials in China, United Arab Emirates and Malaysia. Expect that other U.S. corporations will also be targeted with FCPA violations, as well.

To ensure compliance to FCPA rules, it is crucial to not only know how the international company operates (IE: are the company’s contracts awarded on merit or favors?) but also to implement the appropriate ethical codes and standards of operations at these facilities as the new investor. The biggest hurdle is cracking the old-school method of getting business in exchange for favors (trips, gifts, cash, etc.). But once employees and company officials understand the ramifications of this behavior and are taught the new and improved way of doing business, the risk of exposure to FCPA violations is mitigated, paving the way to do business fairly across borders.

Like all other deals, there are numerous risk factors to be assessed when doing international deals. The barriers to success internationally can be overcome once you are mobilized with information that mitigates your vulnerabilities to fraud, violations of the FCPA or other unexpected outcomes.

Kenneth Springer is President and Founder of Corporate Resolutions Inc. Springer is a Certified Fraud Examiner and former Special Agent of the FBI and co-author of “Digging for Disclosure: Tactics for Protecting Your Firm’s Assets from Swindlers, Scammers and Imposters” (FT Press; January 2011).