Halliburton to Goodyear: FCPA risks and due diligence in foreign acquisitions

Averting their eyes from Africa: Goodyear’s $16m Kenya/Angola settlement highlights risk of insufficient due diligence

Andreas Stargard.

“Foreign acquirers must understand and — likely — challenge the status quo of their new African subsidiaries”

When acquiring an African company, nothing is “business as usual.”  Neither pre- nor post-acquisition can foreign parent corporations simply avert their eyes and let their newly acquired business units be run as before.  The status quo must be understood and – likely – challenged.

Case in point: Goodyear’s Africa troubles (plural, because they originate in both Kenya and Angola).

In its February 24, 2015 news release, the Securities and Exchange Commission (SEC) announced Goodyear’s disgorgement of over $14 million in profits, plus over $2 million in prejudgment interest, as well as reporting, remediation and compliance obligations for a period of 3 years: “Public companies must keep accurate accounting records, and Goodyear’s lax compliance controls enabled a routine of corrupt payments by African subsidiaries that were hidden in their books,” said Scott W. Friestad, Associate Director of the SEC’s Enforcement Division.”

The release details the following alleged violations of the two African subsidiaries, acquired by the Ohio-based Goodyear Tire Company incrementally between 2002 (minority shareholding) and 2006 (when it became a majority owner):

[The Kenyan subsidiary] bribed employees of the Kenya Ports Authority, Armed Forces Canteen Organization, Nzoia Sugar Company, Kenyan Air Force, Ministry of Roads, Ministry of State for Defense, East African Portland Cement Co., and Telkom Kenya Ltd.

Goodyear’s subsidiary in Angola bribed employees of the Catoca Diamond Mine, which is owned by a consortium of mining interests including Angola’s national mining company Endiama E.P. and Russian mining company ALROSA.  Others bribed in Angola worked at UNICARGAS, Engevia Construction and Public Works, Electric Company of Luanda, National Service of Alfadega, and Sonangol.

In the accompanying Order, the SEC alleges that:

1. … From 2007 through 2011, Goodyear subsidiaries in Kenya (Treadsetters Tyres Ltd., or “Treadsetters”) and Angola (Trentyre Angola Lda., or “Trentyre”) routinely paid bribes to employees of government-owned entities and private companies to obtain tire sales. These same subsidiaries also paid bribes to police, tax, and other local authorities. In all, between 2007 and 2011, Goodyear subsidiaries in Kenya and Angola made over $3.2 million in illicit payments.

2. All of these bribery payments were falsely recorded as legitimate business expenses in the books and records of these subsidiaries which were consolidated into Goodyear’s books and records. Goodyear did not prevent or detect these improper payments because it failed to implement adequate FCPA compliance controls at its subsidiaries in sub-Saharan Africa.

Failing to conduct proper due diligence on an African target company is risky at best.  Leaving its day-to-day operations thereafter unchecked and unaltered, however, is the downright equivalent of requesting a cease & desist order (or worse yet, a judgment) from an American or European enforcement agency or court.  As the SEC noted, “the day-to-day operations of Treadsetters continued to be run by Treadsetters’ founders and the local general manager.” (Id. at para. 7).  Goodyear notably “failed to implement adequate FCPA compliance training and controls after the acquisition.”

Luckily for Goodyear (which has since then shed its Kenyan business and is in the process of selling its Angolan interests), the Department of Justice decided not to pursue parallel criminal charges for the same conduct, and so the SEC went ahead solo, culminating in the Order quoted above.

Would Goodyear have benefited from Halliburton?

Generally speaking, a buyer acquires the target’s liabilities — neither the FCPA nor the antitrust laws provide a unique exception to this rule.  A quick look at General Electric’s experience (GE agreed to pay $23.4 million to settle the SEC’s charges, including against two subsidiaries for which GE assumed liability upon acquiring) and eLandia ($2 million payment for its subsidiary Latin Node’s bribery scheme pre-acquisition) amply prove the point.

That said, under certain circumstances where proper and fulsome due diligence is “severely compromised,” a future corporate parent may insulate itself from FCPA liability: flash-back to June of 2008, when the Department of Justice issued valuable FCPA guidance in the form of its Halliburton “opinion procedure release”: In it, the DOJ discussed how it would treat the liability of an acquiring company whose pre-closing investigative ability to conduct full-scale due diligence is, by (foreign) statute or other circumstance, insufficient to guarantee discovery of any existant FCPA liabilities of the acquisition target.  In particular, the DOJ said:

[A]n acquiring company may be held liable as a matter of law for any unlawful payments made by an acquired company or its personnel after the date of acquisition. … Under the
circumstances […] there is insufficient time and inadequate access to complete
appropriate pre-acquisition FCPA due diligence and remediation. As represented by Halliburton, under the application of the U.K. Takeover Code, it has no legal ability to require a specified level of due diligence or to insist upon remedial measures until after the acquisition is completed. As a result, Halliburton’s ability to take action to prevent unlawful payments by Target or its personnel during the period immediately after the closing has been severely compromised. Assuming that Halliburton, in the judgment of the Department, satisfactorily implements the post-closing plan and remediation detailed above, and assuming that no Halliburton employee or agent knowingly plays a role in approving or making any improper payment by Target, the Department does not presently intend to take any enforcement action against Halliburton for any postacquisition violations of the antibribery provisions of the FCPA committed by Target during the 180-day period after closing provided that Halliburton: (a) discloses suchconduct to the Department within 180 days of closing; (b) stops and remediates such conduct within 180 days of closing, or, if the alleged conduct, in the judgment of the Department, cannot be fully investigated within the 180-day period, stops and remediates such conduct as soon as it can reasonably be stopped; and (c) completes its due diligenceand remediation, including completing its investigation of any issues that are identifiedwithin the 180-day period, by no later than one year from the date of closing.

Setting aside the difference in enforcement agencies (SEC in Goodyear vs. DOJ in Halliburton), had Goodyear made an effort similar to that of Halliburton (which, of course, is no stranger to significant FCPA enforcement actions itself (see also here and here on the Bonny Island debacle), despite having sought and obtained this favorable opinion back in 2008), it would have stood to benefit from similar lenience — but only insofar as it concerned initial determination, through due diligence (ideally pre-acquisition, but potentially still within a 180-day window), whether or not its African acquisition posed a corruption risk back in the U.S.

In light of the ongoing nature of the FCPA-violative conduct post-acquisition, however, there appears to be little effort made on behalf of the parent entity to uncover (or, for that matter, halt) the offending actions in Goodyear.  In this regard, notably excluded from the DOJ’s relatively lenient position is, of course, similarly ongoing conduct.  The Department expressly reserves the right to enforce:

(a) any FCPA violations committed by Target during the 180-day period that are not disclosed to the Department during this same time period; (b) any FCPA violations committed by Target at any time where any Halliburton employee or agent knowingly participates in the unlawful conduct; and (c) any issues identified within the 180-day period which are not investigated to conclusion within one year of closing. In no event does this Opinion Release provide any protection for any conduct which occurs after the 180-day period.

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