Indigenization and the FCPA

Major Alexei Dymovsky, the policeman who spoke out against corruption in his YouTube address to Prime Minister Putin, arrives to a news conference November 10, 2009 in Moscow, Russia.

Indigenization efforts in many developing countries are surrounded by controversy and may be done for less than noble purposes, such as lining the pockets of local politicians or appropriating intellectual property and technology under the guise of local empowerment. This article does not take a position on the relative business, political or sociological pros and cons of indigenization, but instead discusses how companies facing indigenization efforts can most effectively mitigate FCPA risk.

Understanding the law

Indigenization efforts can take many forms – from legislative acts, to administrative efforts, to presidential decrees, to tendering rules by national companies that give bidding preferences to companies undertaking indigenization efforts. In many cases the opaqueness of the law itself can provide ample opportunities for corrupt officials to solicit bribes – such as a local labor inspector who claims a company is out of compliance with the indigenization laws, but agrees to overlook the infraction for a cash payment.

Therefore, the primary shield a company can arm itself with is a thorough understanding of the law and regulations, as well as the penalties for failing to comply. Unless a company utilizes locally qualified inside counsel, in most cases this will require consulting with well-respected local counsel (who themselves should be properly screened for anti-corruption risks).

Outside counsel should provide a comprehensive overview of the regulations and consider issues such as:

• What "counts" as indigenization?
• Does there need to be a percentage of ownership by nationals, or is employment of a number or percentage of nationals sufficient?
• Is the kind of employment specified?
• Can a company comply with indigenization efforts by employing locals in unskilled positions, or does the law require that nationals be trained in skilled positions (which may involve the transfer of protected technology or intellectual property)?
• Is there "timeline" or other schedule by which indigenization steps must be completed?
• What are the penalties for failing to indigenize?
• Can operations be stopped?
• Can previously awarded contracts be revoked or modified?

With the advice of qualified counsel as to what the law requires, companies will be both empowered to push back on corrupt officials who claim "non-compliance" with the regulations, as well as respond to indigenization efforts in a manner that will position the company in a commercially competitive position.

Beware the one-stop solution

Once indigenization efforts begin, it is not uncommon for a local cottage industry of consultants, agents, and other local businesses offering "one-stop" solutions to indigenization efforts to quickly pop up. They may offer that by entering into an agency relationship, a consortium agreement, or other form of business ties, they can bring a company into compliance with indigenization efforts through, e.g., providing manpower or by creating and taking control of a local operating entity that qualifies as "native" under the indigenization program.

In some cases such local partners may offer legitimate and viable solutions to indigenization issues. However, there are enough suspect actors in these arenas that thorough anti-corruption due diligence must be performed prior to entering into any agreement.

The due-diligence process for agents and companies connected to indigenization efforts should look closely for ties between the agent and government officials. Whether through family or friendships, a connection between an agent and a government official (especially those in government agencies or industries overseeing indigenization efforts) makes it possible the agent is being used as a conduit for payments back to the official.

Similarly, efforts must be undertaken to ascertain the true owner of such agents or companies to ensure that the ultimate owner is not a government official (or family member) who is using front companies or personnel to provide a patina of independence.

Finally, agents or companies that come "highly recommended" from government officials as solutions for indigenization efforts, or are suggested to be "necessary" to comply with the law, must be viewed skeptically.

Even where such agents can be shown to be truly independent from government officials or their family members, companies must ensure that "real" indigenization efforts are agreed to and undertaken. Knowledge is key, but an agreement that calls for nothing more than payments to a third party – without the employment of nationals or the provision of equity to a local company or person – raises a red flag as to whether such money is being passed through to a government official.

Contract with care

In many cases, use of a local partner and agent may be a necessary early tool in complying with indigenization efforts. However, such agreements should always be drafted with best anti-corruption practices in mind and with an eye to the future.

Agreements with agents or others to assist with indigenization efforts should, from an anti-corruption standpoint, be drafted no differently than any other agency or business agreement. The agreement should include, at a minimum, representations and warranties that the agent will abide by a company's anti-corruption policies and the FCPA, audit rights, and termination rights for corrupt activity.

Regardless of the level of due diligence and strength of contracting, any agent generally present some form of ongoing anti-corruption risk. So while third-party assistance may be necessary early on in indigenization efforts, the contract should be drafted in a manner that contemplates a phase out or termination of the relationship once certain indigenization milestones are achieved, or other steps – such the option of hiring provided manpower as permanent employees after a set time period– that will permit a company to ultimately become "self-sufficient" from an indigenization standpoint

Conclusion

Indigenization efforts present a myriad of challenges for corporations seeking to operate in developing economies in a compliant manner. As companies move to address the nuts and bolts business issues of such efforts, it is imperative that they do not lose sight of the need to ensure that such efforts do not run afoul of the FCPA.

By obtaining a thorough understanding of the local law, remaining vigilant on FCPA due diligence when it comes to working with local partners, and creative contracting, corporations can protect themselves from potential FCPA exposure while they move to comply with local laws. OGFJ

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