Look Before you Leap:

Lessons for PEI Cross-Border Investments.

Greg Swinehart, Partner National Service Area Leader, Forensic & Dispute Services Deloitte Financial Advisory Services LLP April 9th, 2008

Agenda

Enforcement Environment Risk Factors for Latin America M&A Due Diligence
Foreign Corrupt Practices Act Business Intelligence Anti Money Laundering and Office of Foreign Assets Control

Examples

Lessons for PEI Cross-Border Investments

2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

Increased Enforcement Environment

What we want to do is level the playing field for business to play by the rules, Alice Fisher, who heads the Justice Department's criminal division." - U.S. News & World Report article on how the Justice Department's corruption "crackdown" is affecting U.S. and foreign companies, August 13th, 2007

"FCPA issues had not historically been at the top of acquirers' due diligence checklist, but in the wake of several FCPA actions that stalled or even shattered deals, buyers are paying more attention to potential violations and the risk of successor liability." - Mergers & Acquisitions Journal article on how the increased focus on FCPA have made "cross-border deals" more challenging, July 1st, 2007 The SEC is ratcheting up pressure on companies to reveal both publicly and to the government suspicious overseas payments by firms they are seeking to acquire. Wall St. Journal article on Titan FCPA SEC settlement, March 2nd, 2005 Due diligence during mergers is going to be a fruitful source of these (FCPA) cases... - Richard Grimes, Former Asst Director, Enforcement, SEC, November 2004, FCPA Conference, Washington, DC
2 Lessons for PEI Cross-Border Investments 2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

Risk Factors for Latin America

High Corruption Perception Index (CPI) Many Developing Countries

High concentration of state-owned businesses High Fraction of Natural Resource Industries

Lessons for PEI Cross-Border Investments

2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

M&A Due Diligence Checklist

Does company do international business?

Extent of international sales/what countries Nature of sales use of consultants or distributors What industry? Amounts of retainers, commissions and expenses paid to consultants in connection with sales Sales through foreign subsidiaries or joint ventures

Does company have FCPA compliance controls?

Is there a code of ethics and FCPA compliance policy which is distributed to all employees and consultants? What FCPA training is conducted, how frequently and which employees and consultants are trained? Is due diligence performed on consultants? Is due diligence documented?

Lessons for PEI Cross-Border Investments

2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

M&A Due Diligence Checklist (2)

Does company have written agreement for every international consultant?

FCPA/anti-bribery representations and warranties Provisions for short notice termination without cause and the right to terminate for cause upon reasonable belief that a violation of the FCPA representations and warranties may have occurred Prohibition on the use of subagents without the prior written approval of the company Requirement of payment in the country where services are performed, i.e., a prohibition on payments to third countries Audit rights

What is the percentage of commissions paid to international consultants? Records of disbursements

What level of approvals Audit trail of payments tied to invoices and approvals

Lessons for PEI Cross-Border Investments

2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

M&A Due Diligence - Foreign Corrupt Practices Act

DOJ/SEC unequivocal FCPA due diligence critical element of M&A FCPA issues may arise at any point in the transaction, e.g. financial due diligence, anonymous allegations May affect the timing of the transaction as well as the ultimate price paid for the company - reputational harm/disgorgement hard to quantify Successor liability Inaccurate FCPA representations in acquisition documents filed with SEC may subject filer to liability under securities law anti-fraud provisions

Lessons for PEI Cross-Border Investments

2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

M&A Due Diligence Business Intelligence

In the context of an FCPA investigation, specialized due diligence should be conducted to help identify possible foreign government connections or links between an entity or individual Some of the types of information that can be discovered may include:
Ownership interest in a company identifying any direct or indirect foreign government ownership interests, including subsidiaries If an individual shareholder, officer or director is (or is related to) a member of a government body or has any other government connections. Other adverse connections or information regarding the subjects (criminal records, links to organized crime)

Local public records should be gathered in relevant countries, even where records are not available via electronic sources Particularly where public records are sparse, inquiries with human sources should be made to assess business reputation of subject of investigation

Lessons for PEI Cross-Border Investments

2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

M&A Due Diligence Business Intelligence (2)

The availability of certain public records varies from country to country, but some of the typical public records may include:
Business registration filings Business reports on an organization Civil and criminal litigation filings Financial records Media Politically Exposed Persons (PEP) databases Regulatory databases, U.S. and foreign

Lessons for PEI Cross-Border Investments

2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

M&A Due Diligence Business Intelligence (3)

Traditional methods of due diligence alone can potentially lead to famous last words, such as:
The financial and legal due diligence process will pick it up My banker/lawyer/accountant has checked them out with contacts overseas Their references checked out Weve been over to visit them and everything seems fine I don't want to hear bad news because its such a good deal

It is important to take steps to avoid these and other potential pitfalls

Lessons for PEI Cross-Border Investments

2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

M&A Due Diligence Anti Money Laundering

PEIs are exposed to regulatory and reputational risk whenever they expand into geographies that are at a higher risk for money laundering and terrorist financing Companies need to comply with the local and international AML regulations depending on the jurisdictions in which they operate and their types of business. Examples of AML regulations: Bank Secrecy Act, USA PATRIOT Act, Third EU Directive, C-25, etc. As part of the M&A due diligence, an assessment of the companys AML activities should be conducted to determine if there is a robust, formal and written AML program that, at a minimum, addresses the following:
Governance, Organization Structure and Resources Policies and Procedures Know Your Customer (KYC) and Customer Identification Program (CIP) Requirements Transaction Monitoring, Currency Transaction Reports (CTRs) and Suspicious Activity/Transaction Reports (SARs/STRs) Independent Audit and Testing of the AML Program AML Training of Employees
10 Lessons for PEI Cross-Border Investments 2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

M&A Due Diligence Office of Foreign Asset Control

The Office of Foreign Assets Control (OFAC) of the US Department of the Treasury administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction. OFAC violations carry both civil and criminal penalties. Civil penalty amount not to exceed the greater of $250,000 or an amount twice the amount of the transaction that is the basis of the violation. Criminal penalty not to exceed $1,000,000 and imprisonment of not more than 20 years. OFAC has a wide jurisdiction and could be applicable to your company if your company is involved in transactions that are:
Initiated in, completed in or passing through the USA; Involving or facilitated by U.S. citizens; and Involving any entity organized under U.S. law, their overseas branches or subsidiaries and any other entity otherwise controlled by such an entity.

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Lessons for PEI Cross-Border Investments

2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

M&A Due Diligence Office of Foreign Asset Control (2)

As part of the transaction due diligence, an assessment of the companys OFAC program must be conducted to determine if the company is OFAC compliant
Are all transactions and payments that fall within the OFAC jurisdiction covered by the companys OFAC program? Is there a technology solution in place that checks all customer names and transactions against the OFAC list using the most sophisticated matching algorithm? Are there processes and workflow in place to review the potential matches and determine if the match is positive/negative? Are potential transgressions being reported to OFAC within the 10 day limit? Is there a governance structure in place that determines the ownership and control of OFAC sanctions within the company?

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Lessons for PEI Cross-Border Investments

2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

Examples

Paradigm (NASDAQ IPO) Syncor International Corporation (Acquired by Cardinal Health Inc.) ABB VETCO GRAY (Private equity purchase) Titan Corporation (Acquisition dropped by Lockheed Martin following discovery of FCPA violations) Invision Technologies, Inc (Acquired by General Electric Company)

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Lessons for PEI Cross-Border Investments

2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

Recommendations/Considerations

Know Your Market Know Your Target/Partner Guidelines/Expectations of an Investigation Timing, Methodology and Sources are Key Balance Desire with Facts

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Lessons for PEI Cross-Border Investments

2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

Questions & Answers

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Lessons for PEI Cross-Border Investments

2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

 2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/mx/aboutus for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its Member Firms.