CORRUPTION
Private Equity & the FCPA
July 2011 | Peter Turecek, New York & Michael Varnum, Reston, Virginia
As they begin to focus on buyig opportunities in Latin America, private equity firms
need to beware of potential violations of the Foreign Corrupt Practices Act by their
portfolio companies, which could put them in legal jeopardy. Pleading ignorance will
not impress the regulators.
More private equity firms are investing internationally and many are turning their attention to Latin America. In doing so, they are encountering a regulatory environment shaped by increasingly aggressive enforcement of the United States Foreign Corrupt Practices Act. In particular, regulators at the US Department of Justice and the Securities and Exchange Commission have beefed up their investigative teams and are now looking more carefully at majority investors in entities alleged to have violated the law.
While no private equity firm has to date been charged for Foreign Corrupt Practices Act (FCPA) violations by a foreign portfolio company, the threat is real. Exposure to penalties arising from such violations depend on, among other things, the level of management and oversight provided by the private equity firm. The greater its involvement in the portfolio business, the deeper regulators will probably look up the ownership structure in assessing culpability. Simple ignorance will not serve as an adequate defense. Private equity companies that are currently active or expanding abroad therefore need to enhance, or where necessary establish, effective compliance and due diligence procedures.
The difficulty facing private equity firms and other investment vehicles is that the nature and extent of “appropriate” due diligence are not clearly defined by regulators. At a minimum, both private equity firms and their portfolio businesses should have well-documented internal FCPA compliance policies, as well as evidence of an appropriate level of due diligence investigation for transactions. This level will vary by jurisdiction, with locales known for corruption requiring enhanced due diligence measures before entering deals or engaging agents.
Private equity companies also need to ensure that these FCPA policies are rigorously followed. This begins with a clear message from the top that corruption and related practices will not be tolerated, either at the parent company or within portfolio businesses. Appointing a compliance officer, creating a thorough set of policies and procedures for employees and agents, and conducting regular staff training and audits reinforce an appropriate tone to guide the firm’s behavior. These steps should support a corporate ethic rather than force an aversion to risk. It is important to understand that regulators will look for documentation of these policies and consistent adherence to them, should an FCPA issue be identified.
Before entering a transaction, private equity firms need to undertake appropriate due diligence, which includes looking at all local third party participants, agents, representatives, consultants, and joint venture partners. Are the agents exclusive? What connections, if any, exist with the local government or state-sponsored agencies? Who are the beneficiaries of the joint venture partners? An inability to answer these questions may indicate that the private equity firm or portfolio company doesn’t sufficiently understand the relationships of their business partners and activities, leaving them vulnerable to potential FCPA violations and regulatory attention. While it is often impossible to investigate every thread to its conclusion, a consistent, documented methodology of due diligence can help avoid surprises later in the investment lifecycle.
As investment discussions continue, any evidence or rumor of suspicious behavior or governmental contacts should be thoroughly investigated. These are the situations in which enhanced due diligence or actual investigative efforts may help provide deeper factual understanding or context around a rumor or evidence of behavior. The private equity firm and portfolio companies should review all of the deal-related documentation available for accuracy, detail and adherence to standard internal codes of conduct and accounting procedures, including sufficient record of gifts, contributions, reimbursements, travel and entertainment.
The Department of Justice has demonstrated leniency in some FCPA cases because of mitigating factors, including self-reporting, past and continuing cooperation with the investigation, implementation of remedial measures (including an FCPA compliance program), and the absence of prior similar conduct. However, the failure to carry out adequate due diligence can have a devastating impact. Consider eLandia International, which acquired Miami-based Latin Node in 2007 only to learn afterward of potential FCPA violations. The company self-reported to the appropriate authorities, but the ensuing investigation, fines, penalties, and termination of employees decreased the value of the purchase by over $20 million, according to reports at the time. Eventually, eLandia wrote off the entire business.
Self-reporting to regulators – after receiving appropriate legal counsel – is usually the best policy for private equity firms that identify possible FCPA violations, either in the course of acquisition due diligence or in a portfolio company’s ongoing operations. To receive the benefit of such action, though, companies need to have policies and procedures in place and adhere to them. Failure to do so could prove disastrous.
The Authors: Peter J. Turecek ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ), a senior managing director in Kroll’s New York office, is an authority in due diligence, multinational investigations, and hedge fund related business intelligence services. He also conducts a variety of other investigations related to asset searches, corporate contests, employee integrity, securities fraud, business intelligence, and crisis management. Michael E. Varnum, CFE ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ), a managing director in Kroll’s Reston, Virginia office, is a former senior executive of the FBI with specialized experience in anti-corruption, economic crimes and fraud. He has become an authority in FCPA related business intelligence, third party compliance screening and international anti-corruption and fraud investigations.
An earlier version of this article appeared in the May 2011 edition of Kroll's Global Fraud Report. Click on icons below to download a copy of English and Spanish-language editions of the Global Fraud Report.
