Department of Justice Issues Second FCPA Opinion Procedure Release for 2010 Regarding Government Compelled Grants and Due Diligence

Department of Justice Issues Second FCPA Opinion Procedure Release for 2010 Regarding Government Compelled Grants and Due Diligence

On July 16, 2010, the Department of Justice issued Opinion Procedure Release No. 10-02, its second of the year.1  The Opinion Release was issued in response to the request of a U.S.-based non-profit (the "Requestor") that operates micro-finance institutions ("MFIs") around the world, including a wholly owned subsidiary in an unnamed Eurasian country (the "Eurasian Subsidiary").  The Opinion Release addressed the Requestor's plan to transform the Eurasian Subsidiary's current status as a humanitarian organization to that of a licensed bank under local law.  According to the Requestor, this change would allow the Eurasian Subsidiary to attract more capital and offer additional services to customers, while enabling it to benefit from the more predictable regulatory regime administered by the Eurasian country's Central Bank.

As described in the Opinion Release, the Eurasian Subsidiary's plan to change its status was met with a "skeptical view" from its current local regulatory agency (the "Regulating Agency"), which "pressed the Eurasian Subsidiary to take steps to 'localize' its grant capital to ensure that it remains in the Eurasian country."  Pursuant to this "localization obligation," the Regulating Agency required the Eurasian Subsidiary to grant a total of $1.42 million to a local MFI.  The Regulating Agency provided the Eurasian Subsidiary with a list of eligible local MFIs.

Concerned that a grant to an institution "short-listed" by the Regulatory Agency would raise FCPA red flags, the Eurasian Subsidiary undertook an extensive due diligence exercise, carried out in three rounds, regarding eligible grant recipients.  Initially, it reviewed "publicly available information and information from third-party sources" related to the six eligible grantees, and on the basis of this review three of the MFIs were determined to be "generally unqualified to receive the grant funds."  The Eurasian Subsidiary next conducted additional due diligence on the three remaining MFIs, reviewing each organization's "key operating and assessment documents" and interviewing representatives of each entity to determine the existence of government connections and other potential corruption risks.  As a result, the Eurasian Subsidiary ruled out one candidate organization due to unspecified conflicts of interest, and eliminated another based on "the discovery of a previously undisclosed ownership change in the entity."

Although the Eurasian Subsidiary had narrowed the list of candidate grantees to one local MFI (the "Local MFI"), it nevertheless conducted a third round of due diligence, focusing on the Local MFI's possible connections to specific government officials, its reputation for integrity, and whether it had been the subject of criminal investigation or prosecution.  The Opinion Release describes no fewer than seven steps undertaken during this round, including a review of information regarding the Local MFI's parent organization, as well as information regarding the officers, directors, and owners of the Local MFI and its parent.  Information was also reviewed to determine whether the family members of these individuals were government officials.  Further interviews were conducted with representatives of the Local MFI and its parent, as well as references they provided, regarding each entity's ownership and control.  In addition, internet searches were conducted to determine if the Local MFI, its parent, or any affiliated persons or entities, had engaged in illegal or unethical behavior.  This review revealed that one of the board members of the Local MFI and its parent was a sitting government official, although his government position was unrelated to the microfinance industry, and that other directors were former government officials.

The Requestor further represented that the grant, if made, would be governed by a written agreement with the local MFI that included the following controls:

  1. staggered payments over a two-year period designed to allow interim monitoring and to assist the Local MFI in managing the grant;
  2. bi-annual audits by an accounting firm selected by the Eurasian Subsidiary, conducted over a five-year period;
  3. the earmarking of approximately $120,000 from the grant to fund six new staff positions and improve the Local MFI's microfinance procedures and processes, risk management, and other organizational infrastructure;
  4. prohibiting the transfer of any grant funds from the Local MFI to its parent or the use of any grant funds to compensate the board members of either entity; and
  5. the implementation of an anti-corruption compliance program. 

The Local MFI's anti-corruption compliance program was to include: a prohibition against paying bribes; a requirement that accurate records be maintained regarding the grant funds with full access to such records by the Eurasian Subsidiary; and a prohibition against any change in ownership, subject to the "penalty of forfeiting the grant."  The Local MFI was also required to certify compliance with these obligations, and the Eurasian Subsidiary was entitled to reclaim the grant funds if it "received evidence that reasonably suggests a breach of these compliance provisions."

As noted above, the subject of this Opinion Release presented several FCPA red flags, including the fact that current and former government officials held board positions at the Local MFI and its parent and that the proposed grant was compelled by the Requestor's Regulating Agency.  Nevertheless, the Department stated that it was "satisfied . . . that the Requestor has done appropriate due diligence" and commented that the proposed controls "would ensure with reasonable certainty that the grant money from the Eurasian Subsidiary would not be transferred to [government] officials."  The Department cited three previous Opinion Procedure Releases dealing with "charitable-type grants or donations[,]" and summarized the due diligence and compliance controls required in each of them.2  The Department concluded that the Requestor had undertaken all the due diligence steps and controls required by these Opinion Releases, and had added several others as well.  The proposed grant was therefore "consistent with the Department's past approach to grant-related requests."

The facts of this Opinion Release attest to the value of the FCPA Opinion Procedure in confirming the adequacy of pre-transaction due diligence and other safeguards against misconduct. Of particular interest is the provision by which a portion of the requestor's grant funds were earmarked for the support of new staff positions for the Local MFI. Although the Opinion Release contains no details with respect to the process by which these positions will be filled, presumably the Department of Justice was satisfied that no government official would indirectly benefit from the selection of any new staff.

1 See DOJ Opinion Procedure Release No. 10-02 (July 16, 2010), available at http://www.justice.gov/criminal/fraud/fcpa/opinion/2010/1002.pdf.
2 The three Opinions discussed are FCPA Opinion Procedure Releases 95-01, 97-02, and 06-01.  They are available at http://www.justice.gov/criminal/fraud/fcpa/opinion/.

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