Armistice Day: The Risks and Rewards of Foreign Joint Ventures

Ed. Note-we continue our series of guest posts from our colleague Mary Shaddock Jones, who today looks at Joint Ventures and has some pointers for avoiding pitfalls under the FCPA.

In December 2010, RAE Systems Inc., a publicly-traded U.S. corporation headquartered in San Jose, Calif., has entered into an agreement with the Department of Justice to pay a $1.7 million penalty for violations of the Foreign Corrupt Practices Act. According to information contained in the non-prosecution agreement (NPA), RAE Systems developed and manufactured rapidly deployable, multi-sensor chemical and radiation detection monitors and networks. From 2005 to 2008, the company had significant operations in the People’s Republic of China (PRC), and sold its products and services primarily through two subsidiaries organized as joint ventures with local Chinese entities: RAE-KLH (Beijing) Co. Limited (RAE-KLH) and RAE Coal Mine Safety Instruments (Fushun) Co. Ltd. (RAE Fushun).

As to RAE-Fushun, the NPA states that “RAE Systems did not conduct pre-acquisition corruption due diligence of RAE Fushun” but that “given RAE’s System’s experience with KLH described above, the high-risk nature of the location, and the existence of numerous government customers, pre-acquisition corruption-focused due diligence was merited. The NPA further states “as was later confirmed, improper business practices had occurred at RAE Fushun before the acquisition and continued post-acquisition, as RAE Systems failed to implement an effective system of internal controls at RAE Fushun.”

The practical pointer for today’s blog is this – FCPA issues can arise in joint venture transactions. In certain circumstances, it may be necessary to have a “local partner” in order to access local labor, equipment, financing or other resources. In other instances, you may not be able to work in a particular location without contracting with an arm of the local government ...

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