Moderator: Arthur D. Middlemiss, Partner, Lewis Baach Kaufmann Middlemiss Pllc

Speakers: Daniel Claman, Senior Trial Attorney, Asset Forfeiture Money Laundering Section, U.S.

Department of Justice Elizabeth A. Santos, Managing Director & Senior Managing Counsel - International

Enforcement & Investigations, Bank of New York Mellon Corporation J. David Fielder, Manager External Investigations, Integrity Vice Presidency, World Bank Michael E. Yasofsky Jr., Program Director ICITAP Colombia, US Department of Justice

HYPOTHETICAL: INVESTMENT IN TELECOMMUNICATIONS JV/LATAM

REGION

FACTS: • Bigbank’s merchant banking division proposes to acquire a 60% interest in

a telecommunications firm (“Telecorp”) based in a LATAM country.

• Telecorp must be at least 40% locally-owned to acquire the relevant operating licenses.

• The relevant LATAM country has a poor score on Transparency International’s Corruption Perception Index (CPI).

• Bigbank knows Telecorp executives are well connected with the LATAM country officials involved who will decide whether to grant the license.

• Once licensed, Telecorp’s physical plants will require periodic safety and envionmental inspections by local governmental authorities.

• Bigbank personnel will work directly with Telecorp to prepare its license application, and will schedule meetings with licensing authorities to make the case for granting Telecorp the license.

Questions

• What kind of corruption-related risks does this fact pattern present and how and when should Bigbank respond to these risks?

• The fact pattern presents multiple corruption-related risks with a proper and timely response dependent on correct identification of the risk.

Risks • JV partner previously ran Telecorp

– due diligence on Telecorp as an entity-

• covering existing licenses, permissions and good standing certificates, audit records, sales and governmental approval practices, litigation and enforcement history, general reputation and track record, any links to allegations of corruption, negative news, etc;

• focus upon the existence and effectiveness of internal controls including robustness of audit and compliance functions, with special attention to corruption related concerns

– due diligence on other major shareholder/s and officers of Telecorp;

• as to each officer or major shareholder, due diligence must cover: general reputation, professional history and qualifications, litigation and enforcement history, negative news (especially involving allegations related to corruption or fraud), ties to public figures or government officials and PEP status or personal associations with government officials.

Reaction to Due Diligence

• Once due diligence is complete, Bigbank will need to consider the appropriate response:

– alternative 1- due diligence presents dismal picture (ex: Telecorp is not in good-standing, has history of legal and regulatory difficulties, absence of internal controls, etc. and its officers & shareholders have checkered history including allegations of fraud and corruption, etc.) ; best response is probably to exit;

– alternative 2- due diligence presents mixed picture-some strengths, some weaknesses;

• Bigbank decides to go ahead upon condition that Bigbank is able to impose enhanced internal controls and devise mitigants for all identified risks.

Liability NOTE: If Bigbank acquires a controlling interest in Telecorp and Telecorp’s past conduct of its business includes bribery and corruption concerns, these problems are now Bigbank’s problems- even if questionable conduct occurred years (probably up to 5) before Bigbank’s acquisition of its controlling interest.

- SEC and DOJ expect companies that engage in mergers or other business combinations to conduct thorough due diligence to uncover, report and resolve any hidden FCPA issues.

- This can lead to difficulties in a competitive bidding situation or other cases where there is insufficient time (or willingness of the target to fully share information pre-closing) to complete thorough due diligence.

- IN SHORT- THE FIRM THAT PROCEEDS WITHOUT PRE-CLOSING DUE DILIGENCE ON THE ENTITY AND THE PRINCIPALS RISKS BUYING FCPA LIABILITY.

Reactive Measures

• In addition, per US law enforcement, if a firm like Bigbank acquires a controlling interest in a company which turns out to present corruption -related concerns, it must implement strong measures to correct the problem. Such measures include robust compliance programs, training programs and processes to detect and respond

to violations. • If individual employees of the acquired entity remain employed and

are associated with the corrupt conduct, termination of said employees is likely to be necessary. This can result in eliminating the very individuals whose “personal connections” made the target attractive in the first place. The alternative however may be criminal liability of the successor entity.

Other risks

• Note the reference to Telecorp officers’ being “well-connected” to government officials in the LATAM country. If the government officials are sufficiently senior and the “connection” includes certain familiar relationships, obvious corruption concerns are presented; example:

if Telecorp executive is spouse of minister in the LATAM country, granting the telecommunications license to Telecorp is highly likely to result in personal, financial benefit to the official. These connections need to be ascertained in the due diligence – before the investment is made so that, if possible, appropriate mitigants can be devised.

More than PEPs

• The FCPA is not concerned only with PEPS; rather any employee, (probably at any level in the hierarchy) is a government official for FCPA purposes if employed by a government entity or a state-owned enterprise.

• Thus, if, as part of the effort to obtain the requisite telecommunications license for Telecorp, Bigbank officers pursue licensing officials (or employees of the licensing body) with meetings over dinner or other hospitality practices, all such hospitality practices will need to be vetted and documented in a manner consistent with the FCPA.

Business Hospitality

• FCPA permits reasonable hospitality (meals, entertainment, etc.) in connection with the offeror’s promotion of its products or business- however, expenses be bona fide and should be reasonable and not lavish.

• FCPA’s books and records provisions will require that such expenses be carefully documented and preceded by adequate internal controls on their approval and incurrence.

Business Hospitality

• Thus, any and all proposed hospitality or other benefits considered to be offered to any LATAM country licensing official or to any government official involved in the periodic inspections of the Telecorp control towers or the like, will need to be subjected to Bigbank’s compliance program and the must receive approval thereunder.