Date post: | 16-Jul-2015 |
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The Challenges of Conducting Due Diligence Investigations in China
Thomas Fox, Attorney at Law
© Thomas R. Fox / tomfoxlaw.com PC All Right Reserved
Thomas Fox
Tom Fox has practiced law in Houston for 30 years. He now assists companies with FCPA compliance, risk management and international transactions. He was most recently the General Counsel at Drilling Controls, Inc., a worldwide oilfield manufacturing and service company. Before that he was Division Counsel with Halliburton Energy Services, Inc. where he supported Halliburton’s software division and its downhole division, which included the logging, directional drilling and drill bit business units.
Today, Tom writes and speaks nationally and internationally on a wide variety of topics, ranging from FCPA compliance, indemnities and other forms of risk management for a worldwide energy practice, tax issues faced by multi-national US companies, insurance coverage issues and protection of trade secrets.
© Thomas R. Fox / tomfoxlaw.com PC
Business Justification
Qualification Questionnaire
Due Diligence and its evaluation
Contracting
Management of the Relationship
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Background
Hired to investigate ‘sex tape’
Not told about whistleblower or ABC investigation
Investigation led to prominent Shanghai families
Arrested in July 2013
Alleged to have violated 2009 Privacy Law
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The Allegations
Not told what they were charged with until day of trial
Alleged to have obtained about 250 pieces of private information about individuals, including government-issued identity documents, entry and exit travel records and mobile phone records, all apparently in violation of China’s privacy laws
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The Trial
Convicted at one-day trial
Originally to be held in secret but held in public due to US-China trial bi-lateral treaty
Convicted for obtaining personal information as well as government records on identification numbers, family members, real-estate holdings, vehicle owner, telephone logs and travel records
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GSK and China Business Unit
GSK found guilty in one day trial
• $491MM fine
Reilly and 3 others found guilty
Suspended sentences
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The Saga Continues
Humphrey and Wu-found guilty in one-day trial
Sex tape of GSK head in China
Responses to Whistleblower
GSK investigating corruption in Poland, Syria and other countries
SFO formal investigation
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More to Come
46 other GSK employees caught up in prosecution
Current and former employees sue for bonuses
GSK under investigation in UK and US
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Globalization of Enforcement
SBM Offshore – DOJ defers to Dutch prosecutors to permit $240 million settlement
SFO and UK Bribery Act beginning to develop some cases
Brazil opens Embraer case for initial Clean Companies Act prosecution
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Corporate-Alcoa
Alcoa-$384MM fine, including $175MM in profit disgorgement. 5th Largest fine of all-time. No. 1 in disgorgement amount
One Guilty in UK, one prosecution dropped
Fine could have been up to $1bn according to DOJ
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Corporate-HP
$108MM total fine
Multi-country bribery schemes. Complete breakdown in internal controls
Multiple enforcement tools
Criminal Plea in Russia
DPA in Poland
NPA in Mexico
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Avon
2004 to 2008: $8 million systematic bribery scheme to enter and maintain China door-to-door sales market. Up to $750 in total costs
Internal audit discovered bribery scheme
Senior executives at Avon ordered sanitizing of audit report and directed auditor to gather copies of initial report to conceal
Senior executives fired and will be prosecuted
© Thomas R. Fox / tomfoxlaw.com PC
Alstom
Record settlement - $772 million
$75 million in bribes to earn $4 billion in contracts
Grand jury investigation was obstructed
Individual prosecutions for Indonesia broken out to push company to cooperate; DOJ was willing to keep charging individuals
Systemic breakdown and culture of corruption
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Court Creates Two-Prong Test
Recognizing that the least is not dispositive, the Court articled a Two-Prong Test:
Control Test
Function Test
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Control Test
1) The foreign government’s formal designation of the entity;
2) Whether the government has an interest in the entity;
3) The government’s ability to hire and fire the entity’s principals;
4) The extent to which the entity’s profits, if any, go directly into the governmental fisc;
5) The extent to which the government funds the entity if it fails to break even; and
6) The length of time these indicia have existed.
© Thomas R. Fox / tomfoxlaw.com PC
Function Test1) Does the entity have a monopoly over the function it exists to carry
out;
2) Does the foreign government subsidize the costs associated with the entity providing the services;
3) Does the entity provide services to the public at large in the foreign Country; and
4) Does the foreign government generally perceive the entity to be performing a governmental function?
© Thomas R. Fox / tomfoxlaw.com PC
Opinion Release 14-02
© Thomas R. Fox / tomfoxlaw.com PC
Focus on pre-acquisition due diligence in the mergers and acquisition context
Deep dive into questionable facilitation payments
Investigation allowed disclosure, road map forward and proper valuation
No DOJ action if proper post-acquisition remediation and integration
Scott Killingworth and P2P
“Embodied in contract clauses and codes of conduct for business partners, these obligations often go beyond mere compliance with law and address the methods by which compliance is assured. They create new compliance obligations and enforcement mechanisms and touch upon the structure, design, priorities, functions and administration of corporate ethics and compliance programs. And these obligations are contagious: increasingly accountable not only for their own compliance but also that of their supply chains, companies must seek corresponding contractual assurances upstream. Compliance is becoming privatized, and privatization is going viral.”
© Thomas R. Fox / tomfoxlaw.com PC
Downward Push of Compliance
Purchaser oversight of your compliance function
Bank covenants requiring compliance program
Private equity scrutiny and oversight
D&O insurance coverage
© Thomas R. Fox / tomfoxlaw.com PC
Thank-you for Participating in Today’s Webinar
How you can reach Thomas Fox
Ph: 832-744-0264
Follow me at www.twitter.com/tfoxlaw.
Follow my blog at http://tfoxlaw.wordpress.com/
Contact us at i-Sight
© Thomas R. Fox / tomfoxlaw.com PC