Bribery and money laundering considerations for joint ventures

Introduction

Whatever the legal form of a joint venture, the collaboration and joint participation in the JV’s business objectives can present an enhanced corruption risk. This is because in some circumstances, a company entering into a JV could be criminally liable for the corrupt actions of its JV partner, the JV itself, or third parties engaged by the JV (whether or not the company was aware of or involved in the bribery). There may also be exposure to the risk of money laundering offences.

Bribery issues can also give rise to broader reputational and financial risks, including a significant risk to value where the corruption taints the JV’s key assets, results in criminal or regulatory investigations, or leads to civil disputes. These risks have translated into action by regulators and enforcement agencies for example, Eni recently entered into a c.US$25m settlement with the Securities and Exchange Commission (SEC) under the accounting provisions of the Foreign Corrupt Practices Act (FCPA) in relation to the actions of its 43 per cent owned JV (Saipem) (see here).

However, these risks can be addressed and mitigated by diligence and compliance monitoring in three key areas explored in further detail below (see “Managing the risks”):

• Due diligence: Risk-based anti-bribery and corruption (ABC) due diligence in relation to the proposed JV, JV partner, relevant operating jurisdictions, and any assets or business to be transferred to the JV should be undertaken.
• Processes and procedures: The JV should adopt and follow effective ABC compliance procedures to apply during the life of the JV. These may be influenced by or draw heavily from the compliance procedures which corporate shareholders have themselves adopted. However, because different shareholders have different risk tolerances, the governance framework of the JV should be structured before formation to ensure that disputes amongst shareholders as to the robustness of such procedures or can be resolved so that these procedures reflect the risk tolerance of the respective shareholders.
• Documentary provisions: It will be important to consider how compliance obligations should be recorded in the agreement between the JV participants. As a minimum, this is likely to permit the parties’ rights to monitor ABC compliance procedures and be informed of ABC issues but the contractual terms may also address how risks are to be managed appropriately (which may even include exit or termination provisions in serious cases).

The legal framework

At the inception of any joint venture it will be important to assess, as far as practicable at that time, the legal framework which will apply, having regard to relevant considerations such as the countries of incorporation of the participants as well as the proposed jurisdictions to which the activities of the joint venture will extend. Notwithstanding such analysis, it should be kept in mind that many regimes (notably the US and UK) have extra-jurisdictional reach and an active enforcement policy and so an understanding of the law of such jurisdictions will also be required.

We set out below a brief summary of the application to JVs of the principal ABC legislation in the UK, the US and Germany.

UK

Under the UK Bribery Act 2010, the key offence for corporates is the Section 7 ‘failure to prevent offence’. A commercial organisation¹ will be liable to prosecution if a person associated with it bribes another person, intending to obtain or retain business or business advantage for that commercial organisation. More detail in relation to the offences under the Bribery Act and the jurisdiction for these offences is set out in our article here. UK Ministry of Justice guidance in relation to the Bribery Act² provides that a JV partner may be liable where:

• The person paying the bribe (JV, other JV partner or third party engaged by them) is providing services to the JV partner; and
• There was an intention to obtain or retain an advantage for the JV partner.

It is important to note that the UK Serious Fraud Office may seek to investigate regardless of technicalities of the application of the Bribery Act (which remain largely untested). This means that many of the negative impacts of a criminal case will be felt whether or not the SFO ultimately proceeds, or would succeed with a prosecution.

In addition to bribery-related offences, JV partners must be mindful of money laundering risks resulting from bribery issues. Dealing in any way with proceeds of suspected bribery (e.g. dividends, proceeds from a tainted contract) may give rise to offences under the UK Proceeds of Crime Act 2002 (POCA), regardless of whether the JV partner would be liable for the underlying bribery. For example, in 2011 MW Kellogg Limited (MWKL) agreed to pay a civil recovery order under POCA following alleged bribery of government officials by a minority-owned JV in Nigeria. Although MWKL itself took no part in the corrupt activity, its dividend receipts were payable from profits generated by contracts obtained by the JV’s corrupt payments. Where money laundering is an issue, consent (i.e. a defence to money laundering offences under POCA) can be sought from the UK National Crime Agency.

US

For public companies, although the FCPA’s accounting provisions are directed at “issuers,” an issuer’s responsibility extends to ensuring that subsidiaries or affiliates under its control, including foreign subsidiaries and joint ventures, comply with the accounting provisions of the FCPA. For instance, the Department of Justice (DOJ) and SEC brought enforcement actions against a US company for violating the FCPA’s accounting provisions when two Chinese joint ventures in which it was a partner allegedly paid bribes and recorded the payments on the books as “business fees” or “travel and entertainment” expenses. Although the payments were made exclusively in China by Chinese employees of the joint venture, the US company was made liable for failing to have sufficient controls and failure to act on red flags indicating that its affiliates were engaged in bribery.

The DOJ recognizes that companies may not be able to exercise the same level of control over a minority-owned subsidiary or affiliate as they do over a majority or wholly owned entity. Therefore, if a parent company owns 50 per cent or less of a subsidiary or affiliate, the parent is only required to use good faith efforts to cause the minority-owned subsidiary or affiliate to devise and maintain an appropriate compliance program and system of internal accounting controls consistent with the company’s own obligations. However, as the recent Eni/Saipem matter (noted above) shows, in some cases, even a non-majority interest can render an entity purportedly subject to US jurisdiction liable for the acts committed by a JV in which it owns less than a 50 per cent interest.

Germany

Although there is so far no corporate criminal liability for bribery under the German Criminal Code, financial penalties of up to €10 million may be imposed on the company under the German Administrative Offences Act. Such a penalty may be imposed where either: (i) a member of senior management has committed a criminal offence (e.g. offering or accepting bribes); or (ii) the company has omitted to put in place appropriate measures to prevent or to significantly impede acts of bribery being committed at the company.

There is no clear guidance under German law as to whether companies should conduct due diligence or impose specific compliance measures in relation to JVs, but this is prudent given the broader risks. As in the UK, German entities should also keep in mind money laundering risks resulting from bribery issues. Dealing with the proceeds of bribery – even the mere receipt of such funds – may be considered a money laundering offence.

Managing the risks

Due diligence

Careful due diligence on any assets and businesses to be transferred to the JV will help to assess the risk of losing tainted assets, key contracts being terminated, and of future investigations or litigation.

It is also important to understand the inherent risk in the relevant jurisdiction, particularly where you are entering a new market. In markets with local ownership requirements, it is crucial to drill down on the beneficial ownership of the local partner, and what their political/government connections are. It is not unusual in certain jurisdictions for the local partner to be connected to, or ultimately owned by, senior politicians. In this scenario, the act of entering into the JV may itself give rise to bribery risks.

Understanding the JV partner’s approach to ABC risk and any previous ABC issues is also fundamental to assessing the risks of an ongoing relationship.

Implementation of ABC procedures

Ensuring the JV implements effective ABC procedures is essential. The procedures should be designed to manage the risks identified in due diligence, and be informed by an ongoing risk assessment. As far as possible, the procedures should be aligned and consistent with the policies of the participants in the JV.

Particular focus is required in relation to training employees to consistently identify and escalate ABC issues (particularly those in higher risk roles/who have come from a JV partner), third-party due diligence and monitoring (it may even be prudent to make appointment of third-party agents or representatives a reserved matter under the JVA), as well as focus in relation to how issues are investigated. Consideration should be given to requiring (or having the right to conduct) a periodic - and ideally legally privileged - assessment of the effectiveness of ABC procedures.

JVA provisions

The ABC provisions of the joint venture or shareholders’ agreement and associated documents are important: in addition to the points set out above, it is important to ensure that the other JV partner is obliged to notify the participants of any ABC allegations or investigations, provide all relevant information/allow an audit if issues arise, and ultimately actual or alleged infringements may form the basis of grounds to exit or terminate a JV.

Further reading

• A summary of the UK Bribery Act
• A summary of the new US DOJ expectations from a UK perspective (and webinar on US/UK expectations in relation to compliance programmes)
• Key points to manage ABC risk in relation to charitable donations
• Eni case re governance responsibility for minority owners
• Draft bill on German corporate criminal law (a further German language update video is provided here)