Follow-Up Purchase of a Business from a Foreign Official

compliance and bribery

There are obstacles when trying to buy a business from a foreign official. The Foreign Corrupt Practices Act prohibits giving or offering anything of value to any foreign official with a corrupt intent to assist in obtaining or retaining business. It is not a flat prohibition on business relationships. But all of the recent FCPA enforcement has made businesses skittish when dealing with a foreign official in a business relationship.

The latest Department of Justice’s Foreign Corrupt Practices Act Opinion Procedure Release is evidence of the overly-cautionary approach.

A US investment banking/wealth management firm bought a majority interest in a foreign financial firm. The seller retained a minority interest in the foreign firm and was locked-out from selling for five years. The seller ends up getting appointed as a high-level government official, responsible for financial industry regulation. Suddenly, the firm’s minority shareholder is a government official.

The US firm wants to buy the remaining minority interest, but the red alarm of the FCPA is flashing. Even worse, the contractual formula for calculating the sales price for the minority interest no longer works. It results in a zero value when there is significant value. There would be litigation if the US firm tried to enforce that zero dollar purchase price.

The US firm and foreign official do the right thing for a conflict situation. They hire a third party to value the asset and base the sales price on that value. The parties even use a “leading, highly regarded, global accounting firm” to determine the value.

As for the official acts, the foreign official has recused himself from any actions that would involve the firm and has notified his agency of his relationship with the firm.

The firm received assurances from the foreign country that the sale of the minority interest would not violate local law.

Shouldn’t that have been enough? The parties documented the transaction price, walled the regulatory agency, and got a legal opinion that the transaction did not violate local law. That should have been enough to eliminate any signs of corrupt intent that would result in violation of the FCPA. Even more, buying the minority interest would remove the ongoing conflict that the foreign official had with owning an interest in a regulated entity.

But one or both sides decided they wanted more and used the Department of Justice’s FCPA opinion procedure. It’s one of the funky features of the FCPA that you can ask the government if it’s okay to do something. This is the DOJ’s first Opinion Procedure Release of 2014 and only the second release since October 2012.

The firm then went through an 8 month process with the Department of Justice to get this Opinion Procedure Release. It seems like overkill.

I would suspect the parties thought the transaction was high profile enough that it would attract the attention of the Department of Justice. Then the firm would need to sit through a Department of Justice investigation on the transaction and possibly print a press release about the investigation. It seems from the steps that the firm took, it could tell a good story and provide all the right documentation. You would think that the DOJ would quickly see that there was no story and go away quickly.

The Opinion Release acts a preventive measure. There are clearly red flags associated with the transaction. The firm and foreign official appeared to have done a great job addressing the concerns.