If recent headlines are any indication, business is clearly booming for anti-corruption enforcement agencies targeting emerging market joint ventures (JVs).
Mining giant Rio Tinto is still the middle of an ongoing investigation into alleged illegal payments related to its Simandou joint venture in Guinea, a crisis that has triggered executive resignations and threats of shareholder lawsuits even before any formal enforcement action takes place.
Meanwhile, Eni CEO Claudio Descalzi is facing potential prosecution over alleged corruption in a partnership with Shell to acquire oil rights in Nigeria, as other firms continue to pay significant fines to resolve formal enforcement actions linked to JVs.
Take AB InBev, which recently paid $6m to resolve books, records and internal controls violations of the US Foreign Corrupt Practices Act (FCPA) related its 49%-owned JV in India. Or GSK, which spent $20m settling an FCPA enforcement action precipitated by inappropriate payments at a majority-owned JV in China.
Questions to ask
All this should give JV dealmakers pause for thought, especially when considering regions where bribery might not be considered an unusual part of doing business. While emerging markets remain an important source of growth for many of the world’s largest companies, the importance of managing corruption and bribery risk in emerging market JVs cannot be overstated.
To ensure that anti-corruption concerns influence the shape of a deal, a negotiating team might start by asking a series of questions related to its various aspects.
For example, after thinking about the potential corruption risks in a Chinese retail JV, one US company structured the agreements so that its internal staff would manage the JV’s purchasing and supply chain function under a service level agreement. In carving this function out of the JV, the company believed it would materially reduce the risk of corruption, as well as leverage its purchasing scale and build its own knowledge of the Chinese supply base.
Short of removing certain functions from the JV, companies might look to establish committees that actively oversee and direct certain high-risk venture functions. For example, in a 50-50 automotive JV in China, the legal agreements stipulated that separate committees would be created for brand management, network development and dealer management, and that the global partner would chair these committees and direct overall activities within these parts of the venture.
This gave the global partner a practical level of control over sales and distribution that reduced the risks of corruption in the sales function, even though it did not control the overall venture.
Thinking creatively about voting rights and delegations is another way to manage corruption risk. Consider a European industrial company entering into a JV in China. Local ownership regulations required that the Chinese partner be the majority owner. The European partner proposed, and got agreement on, a voting regime that required super-majority approval on a range of financial, commercial and organisational decisions.
Having a US citizen as the JV CEO can create some unexpected advantages. In a 50-50 Russian natural resources JV, the Russian partner was not particularly open to including specific compliance terms in the JV agreement, but it did agree that the JV would adhere to the FCPA and the US partner would have the right to appoint the CEO. For the US partner, these two simple terms translated into significant compliance leverage.
Today, the US CEO they selected considers the FCPA a “powerful licence to behave”, and uses both his personal risk of jail and the promise to follow the FCPA in the JV agreement to push compliance on a daily basis. The JV CEO keeps a highlighted and well-worn copy of the FCPA in his briefcase, and is well known for regularly pulling it out and waving it in the air at key moments, saying: “I’m an American, I can’t do that.”
Vigilance is all
Finally, the deal team should also ask about audit rights and information access. In some cases, such deal terms are straightforward to negotiate. The local partner might be resistant because the deal term represents an added cost, increased management complexity, decreased control, or a handcuff in operating successfully in the local market.
It can be helpful for the global partner to think about what ‘currencies’ it holds to entice action, including the global partner agreeing to cover certain added compliance-related costs. Beyond agreeing to cover certain costs, a company might also consider offering non-cash currencies to the local partner.
With the risks of falling foul of the law continuing to grow, companies forming JVs in emerging markets should also be vigilant in improving anti-bribery and corruption measures when structuring the agreements.
Joshua Kwicinski is senior director at Water Street Partners, an advisory firm on joint ventures (https://www.waterstreetpartners.net/).