COMPLIANCE: A KEY COMPONENT OF M

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COMPLIANCE A KEY COMPONENT OF MA DUE DILIGENCE
IN UKRAINE

• INVEST IN UKRAINE REVEALING THE POTENTIAL
• Adam M. Mycyk
• Chadbourne Parke LLP, Kyiv, Ukraine
• June 11, 2013

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WHY CARRY OUT DUE DILIGENCE?

• Uncover undisclosed liabilities
• companies may have liabilities that may not
  appear in their accounts (e.g.,
  sureties/guarantees)
• companies may keep two sets of books
• Duty to shareholders
• Compliance with laws, e.g., Foreign Corrupt
  Practices Act (FCPA), UK Bribery Act, anti-money
  laundering laws, etc.
• Issues important to Western investors may not
  always be of concern in purely domestic
  transactions competitive disadvantage?

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WHY WORRY ABOUT COMPLIANCE?INCREASE IN FCPA
ENFORCEMENT!

• Siemens agrees to pay 800 million fine to settle
  FCPA bribery charges (December 2008)
• Halliburton to pay 402M for foreign bribes
  (February 2009)
• FCPA sting operation nets 22 executives for FCPA
  violations (January 2010)
• BAE Systems agreed to pay 400 million FCPA fine
  (March 2010)
• Delaware company Innospec, Inc. to pay 40.2M for
  FCPA violations (March 2010)
• Daimler to pay 185M to settle charges of making
  millions in foreign bribes (April 2010)

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UKRAINE AND CORRUPTION

• 2012 Corruption Perception Index published by
  Transparency International ranks Ukraine 144th
  out of 174 countries
• Recently, President Yanukovych reported that
  Ukraine suffered budgetary losses of over 2.5
  bln in 2012 due to corruption
• Ukrainian government has declared a war on bribes
  and corruption as a state strategic priority
• New Ukrainian laws and concepts implemented but
  enforcement weak
• Global movement to combat corruption close to
  40 countries have enacted comprehensive
  anti-corruption legislation
• Enactment of the UK Bribery Act and the
  aggressive enforcement of the US foreign Corrupt
  Practices Act (FCPA) have raised additional
  concerns for businesses operating or planning
  to operate in Ukraine

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FCPA TWO PRONGS

• Anti-bribery provisions
• prohibit companies and individuals from making
  corrupt payments to foreign officials to obtain
  or retain business
• any US citizen or US company or any person if any
  part of the act took place in the US
• payments include anything of value, including
  promises or offers
• foreign official includes any government
  employee, political party, candidate and even
  employees of government owned entities
• obtain or retain business includes efforts to
  gain a business advantage such as favorable tax
  treatment
• Books, records and internal controls
• applies to companies listed in the US and
  requires them to
• keep accurate records that fairly represent
  transactions
• maintain a system of internal controls to ensure
  proper management control and reasonable accuracy
  of books and records

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UK BRIBERY ACT OFFENSES

• Promising, offering or giving, or requesting,
  agreeing to receive or accepting an advantage
  (financial or otherwise) in circumstances
  involving the improper performance of a relevant
  function
• relevant function or activity a public or
  business activity, which a reasonable person in
  the UK would expect to be performed in good
  faith, impartially or in a particular way by
  virtue of the fact that the person performing it
  is in a position of trust
• improper performance breach of that
  expectation
• Promising, offering or giving an advantage
  (financial or otherwise) to a foreign public
  official intending to (1) influence the FPO in
  his capacity as such, and (2) to obtain/retain
  business/advantage
• Strict liability for companies where an active
  general or FPO offense is committed anywhere in
  the world by someone performing services on the
  companys behalf intending to obtain/retain
  business/advantage

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US FCPA v UK BRIBERY ACT
FCPA Bribery Act 2010
Scope of anti-bribery provisions Applies to offerers/payers of bribes to foreign public officials only Wider offerers, payers, requesters and accepters of bribes in public or private sector (domestic or foreign).
Bribery of foreign public officials (FPO) Briber must intend to obtain or retain business. Affirmative defense if payment is lawful under written laws and regulations of the FPO. Discrete FPO offense briber must intend to obtain or retain business or an advantage in the conduct of business. No offense if acceptance is permitted or required by the written law of the FPO.
Corporate liability No specific corporate offense. A company may be liable for employees acts via theory of respondeat superior i.e. if an employee bribes, the company is liable. Adequate procedures will not provide a defense, but may mitigate sentence. Corporate offense automatic liability where an act of bribery has been committed by a person performing services on the corporates behalf anywhere in the world. Defense available if the corporate has in place adequate procedures designed to prevent bribery.
Liability of senior officers for corporates acts Senior officer may be liable for a companys failure to devise and maintain appropriate anticorruption controls in capacity as a control person. A senior officer may be liable for a general bribery offense or FPO offense committed by the company if they consented or connived in that offense.
Jurisdictional scope Applies to anyone if they do anything on US territory in furtherance of bribing a foreign public official. Otherwise only to US companies/citizens or issuers ( a company with securities registered on a US exchange or reporting to the SEC) in respect of their actions anywhere in the world. Applies to anyone if they perform any act or omission in the UK forming part of a bribery offense. Otherwise UK corporates, British nationals and those ordinarily resident in the UK, in respect of their actions anywhere in the world. Corporate offense applies to all corporates who carry on business or part of a business in the UK, irrespective where bribe occurs.
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US FCPA v UK BRIBERY ACT
FCPA Bribery Act 2010
Defense for promotional expenditure/corporate hospitality Affirmative defense for reasonable and bona fide business expenditures directly related to the promotion, demonstration or explanation of products or services, or explanation of products or services, or the execution or performance of a contract with a foreign government or agency. No similar defense.
Facilitation payments Exemption for small payments to foreign officials to expedite or secure the performance of a routine government action. No similar exemption.
Books and records provisions Liability for failing accurately and fairly to record transactions in the books and records of an issuer. No equivalent in the Bribery Act, but there are false accounting provisions in other legislation.
Penalties Penalties for individual include Up to 5 years imprisonment per violation Fines up to 250,000 or twice the bride paid/benefit obtained (whichever is greater) Penalties for companies include Fine per violation up to 2m or twice the bribe paid/benefit sought or obtained (whichever is greater) Debarment from US Government contracts (discretionary) Penalties for individual include Up to 10 years imprisonment Unlimited fines Disqualification for directors Penalties for companies include Unlimited fines possible confiscation under POCA 2002 Debarment from EU public contracts (automatic and perpetual)
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UKRAINIAN RULES ON CORRUPTION

• Law of Ukraine on Prevention and Combating
  Corruption
• Enacted on July 1, 2011
• Extraterritorial Effect
• Catch-all Public Officials Notion
• Private Corruption
• Termination of Benefits
• Confiscation of Income/Profit
• Suspension/Termination of Employment.

• Liability for Non-reporting Corruption
• Liability for Offer or Promise of a Bribe
• Liability for Hiring Former Officials
• Criminal Liability for Legal Entities
  (upcoming)
• Penalties range USD10K-160K
• Limitation of Activity
• Liquidation of Corporation.

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BE PREPARED

• Completion of a merger or acquisition does not
  extinguish the legal consequences of FCPA
  violations
• US government can impose successor liability and
  penalize companies for past violations of the
  FCPA committed by acquired entities
• A company must thus have
• a comprehensive compliance program for its own
  regular business operations
• a complete understanding of the anti-corruption
  compliance practices and history of any
  company/entity it seeks to acquire
• Due diligence is crucial and should happen well
  in advance of the decision to proceed with a
  transaction

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WHAT TO TYPICALLY LOOK FOR IN DUE DILIGENCE?

• Corporate
• Ownership
• Regulatory licenses, permits, other approvals
• Liabilities loan agreements, guarantees,
  long-term contracts
• Litigation
• Related Party transactions/outside of ordinary
  course
• Contractual matters
• Environmental
• Taxes
• Assets - production assets/real estate and land
  rights/encumbrances
• Labor matters terms and conditions/payroll/priva
  te entrepreneurs
• Customer and Supply Issues
• Accounting and Records
• IP and IT

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COMPLIANCE DUE DILIGENCE

• Begin due diligence early this takes time and
  findings may often prevent a deal from proceeding
• Involve anti-corruption experts focus the
  review/save time/conduct it simultaneously with
  legal/tax/financial/other DD
• Analyze the companys current anti-corruption
  compliance program Compliance officer?
  Procedures? Training? Audits?
• Thorough anti-corruption due diligence review and
  risk/red flag assessment (counterparty, target
  and all subsidiaries)
• Verify the implementation of a formal compliance
  program going forward prior to closing confirm
  that the existing anti-corruption compliance
  program meets the standards necessary to
  eliminate violations following the sale.
  Important when the target was previously not
  subject to FCPA or in a country, such as Ukraine,
  with relaxed corruption enforcement.

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RED FLAGS TO CONSIDER

• History of Title to Key Assets
• Title to Real Estate and Land
• Regulatory Approvals Obtained
• Distribution Network Control
• Shipment and Customs Clearance

• Tax Optimization Structures
• Double Accounting
• Books
• Private Entrepreneur Contracts
• Shadow Salaries
• Close Affiliations with Officials

No Problems with Authorities BIGGEST RED FLAG!!
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POST-CLOSING MECHANISMS

• What if you cant determine potential violations
  prior to closing?
• Negotiate specific indemnity provisions for
  undiscovered violations not always entirely
  effective, particularly when individual employees
  are involved in criminal prosecutions
• Seller representations and warranties in SPA
  that it is not aware of any actions by
  employees/agents/representatives that could
  directly/indirectly result in violations of
  anti-corruption laws
• Generally difficult to structure representations
  and warranties when results of review are
  inconclusive
• Sellers often reluctant to provide these
• Negotiate a reasonable holdback amount to
  cover
• Fines, penalties, etc. due to violations that
  occurred pre-closing
• Services of outside counsel, as necessary, to
  deal with any charges

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KEY COMPLIANCE PROGRAM COMPONENTS

• Routine due diligence of sales agents/distributors
  /consultants
• Contracts/agreements protecting the company
  against possible FCPA/anti-corruption law
  violations
• Adequate internal accounting controls on
  payments, invoices, books, records and audits
• Regular company-wide training and anti-corruption
  audits
• A reporting mechanism e.g., a hotline for
  employees to report potential violations
• Policies/oversight regarding allowable payments
  (e.g., gifts, etc.)
• Policies regarding communications with officials
• American Chamber of Commerce in Ukraine has just
  started a compliance club to share best practices
  amongst members!

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Contact Us

• Adam M. Mycyk
• International Partner
• Chadbourne Parke LLP
• 25B Sahaydachnoho Street, 3rd Floor
• Kyiv 04070, Ukraine
• Tel [phone]
• amycyk_at_chadbourne.com
• www.chadbourne.com