Incoterms_® and Commercial Contracts

Joint ventures are vital for business. Your company, like all the others, cannot do everything on its own and, as we have seen in Chapter 14, it will sometimes need input from agents, intermediaries, and other third parties. In other circumstances, it will make good business sense for your company to join forces with other companies to pursue a specific project or activity. This will give rise to the formation of an incorporated or unincorporated joint venture. Creating a joint venture is a commonly accepted business solution but may raise new corruption risks, which should be carefully managed. This Chapter provides an overview of the policies and procedures which your company should put in place before entering a joint venture agreement, and which it should enforce during the life time of the joint venture, in order to keep clean from corruption.

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INTRODUCTION

In certain circumstances, joint venture partners may be held criminally liable for acts of corruption carried out for the benefit of the joint venture. Companies should therefore take measures, within their power, to ensure that joint ventures in which they participate enforce effective anti-bribery and antitrust rules and establish adequate internal control systems.

Joint venture arrangements come in many forms. As a general rule, companies planning to enter into a joint venture implement policies and procedures to effectively guard against corruption risks. In this Chapter, we refer to this systematic framework of policies and procedures as the company’s joint venture policy.

The aim of a joint venture policy is to ensure that:

• The company only enters into joint venture agreements with partners who have the right reputation for integrity;
• The negotiation and implementation of a joint venture agreement is carried out with diligence, transparency, and honesty, and in full compliance with applicable anti-corruption and antitrust laws;
• An adequate anti-corruption and antitrust programme is established to regulate the joint venture’s future activities; and
• The activities of the joint venture are appropriately monitored, especially in areas that are prone to corruption and competition risks.

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A joint venture policy covers four basic areas:

• First, it sets forth the due diligence process that a company should follow before deciding whether or not to enter into a joint venture agreement with a potential partner and how often such a due diligence process should be renewed;
• Second, it determines the clauses, representations, and warranties that should be included in contractual documentation relating to the setting up and activities of the joint venture;
• Third, it defines the procedures and control systems that should be implemented once the joint venture is established in order to prevent corruption and other criminal offences; and
• Fourth, it outlines the role and responsibilities of the company’s representatives in monitoring the activities of the joint venture.

A joint venture policy should clearly define at the outset which internal corporate functions are to be involved in the negotiation and management of the joint venture, as well as in the conduct of preliminary anti-corruption and antitrust controls. It is particularly important to make clear which input will be expected from the compliance and the legal functions.

It is advisable to involve at least two separate internal corporate functions. This normally includes the business unit proposing the joint venture and the company’s legal and compliance function, including anti-corruption and antitrust legal support, where available. For the purpose of this Chapter, we assume that such legal support (the Anti-corruption and Antitrust Support Unit) already exists in the company.

Finally, a company should provide – as part of its broader compliance programme – a framework for bringing all joint ventures that pre-date the adoption of the joint venture policy into compliance with its basic requirements.

1 DUE DILIGENCE ON POTENTIAL PARTNER(S)

Before a company enters into a joint venture agreement, it should conduct due diligence on its potential partner(s). The responsibility for leading the due diligence normally sits with the business manager (the Manager) promoting the participation in the joint venture.

The joint venture policy should describe the normal procedure for conducting due diligence on potential partners (the standard due diligence) and indicate the cases where such due diligence may be reduced or even omitted (the reduced due diligence). For instance, a reduced due diligence may be sufficient when the potential partner has an excellent ethical reputation or has a long-standing relationship with the company and is positively known to be honest and reliable.

When the Manager believes that a reduced due diligence should be conducted on a potential partner, he or she should submit a written request to the Anti-corruption and Antitrust Support Unit specifying the reasons for this request. After evaluation, the Anti-corruption and
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Antitrust Support Unit shall specify in writing whether it believes that: (i) it is necessary to conduct a standard due diligence, or that (ii) a reduced due diligence will be sufficient, in which case it should specify which of the due diligence requirements listed in Section 2 below can be modified or waived, or that (iii) a due diligence is not necessary.

2 STANDARD DUE DILIGENCE REQUIREMENTS

A standard due diligence procedure should be based on the following steps and requirements:

Step 1: The Manager asks the potential partner to fill out a due diligence questionnaire in order to gather information and documentation about its corporate ownership, business history, and other relevant facts.

Step 2: The Manager collects further information on the potential partner from available sources, including public records. The amount of information to be gathered will depend on the particular circumstances of the situation at stake, such as the company’s knowledge of the partner based on prior dealings; the importance of the project for which the joint venture is being established; the specific risks associated to the country where the joint venture will operate; the role that the partner will have in the management of the joint venture; and, in general, the perceived level of risk (also from a competition perspective) associated with the joint venture.

Step 3: Information and material collected from the potential partner are checked and confirmed as appropriate against publicly available information, Internet searches, and external sources (including embassies, consulates, international exchange agencies, and chambers of commerce). Appendix A at the end of this Chapter gives an example of due diligence guidelines which could be used as a basis for reviewing and verifying the information collected through the due diligence questionnaire and other means.

Step 4: The Manager should watch for specific red flags, meaning instances which suggest a strong corruption risk. Appendix B at the end of this Chapter gives a list of common red flags to look after.

The data and information gathered through the due diligence exercise should be adequately documented and collected in a note (the Note) to be signed by the Manager and submitted to the Anti-Corruption and Antitrust Support Unit.

The Note should indicate:

• The reasons for which the creation of the joint venture is deemed necessary (or at least useful) for the pursuit of the company’s strategic objectives.
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• How the potential partner’s name came about; which external entity, if any, recommended the potential partner; which corporate area or business unit within the company received the recommendation and gave the potential partner’s name to the Manager.
• A declaration that due diligence was completed and that verifications were conducted in compliance with the principles contained in the joint venture policy and other applicable internal policies.
• A description of any red flags or particular risks identified during the due diligence process.
• If due diligence was reduced or omitted, a clear statement of the due diligence activities that have been conducted along with a description of the guidance received by the Anti-Corruption and Antitrust Support Unit about the appropriate level of due diligence to be undertaken (or not).
• The name(s) of the person(s) chosen (see Section 3 below) to conduct the negotiations with the potential partner on the company’s behalf.
• A declaration that the person(s) who personally interviewed the partner’s representative(s) concluded that there were no reasonable grounds for believing that the partner would violate or would cause the joint venture to violate applicable anti-corruption and antitrust laws.
• Information on any current or past relationship between the company (or its subsidiaries and affiliates) and the potential partner.
• A specific description of the structure of the joint venture and of the activities that the joint venture will be carrying out.
• A list of the sources that have been used to verify the information provided by the potential partner in the due diligence questionnaire and throughout the due diligence process.

The Note, signed by the Manager and including all supporting documentation, should be sent by the Manager (or by another person delegated to act on the Manager’s behalf) to the Anti-corruption and Antitrust Support Unit.

The Anti-corruption and Antitrust Support Unit shall then evaluate the results of the due diligence on the basis of the due diligence guidelines and the existence of red flags. It may then make its decision known and, if necessary, suggest to the Manager possible actions to address red flags that may have been identified.

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3 NEGOTIATION PROCESS AND REQUIREMENTS

Once the choice of the partner has been finalized, the negotiation of the joint venture agreement can begin.

The Manager should appoint at least two individuals to carry out the negotiation of the joint venture agreement. These individuals should belong to separate corporate functions and should not have a hierarchical relationship with each other.

• If your company is going to exercise control over the joint venture: Your company should cause the joint venture to adopt an internal compliance programme, including anti-bribery and antitrust policies and procedures, in line with those it has adopted. An adequate internal control system should be also adopted and implemented, taking into account the specific risk factors related to the country of incorporation of the joint venture and the country in which the joint venture will operate.
• If your company is not going to exercise control over the joint venture: Your company shall use its influence, to the extent reasonable under the circumstances, to cause the joint venture to: (a) adopt principles of ethical conduct, including anti-bribery policies and procedures as well as antitrust principles, in line with those adopted by your company; and (b) meet the standards set out in your company’s internal control system, by adopting and maintaining an adequate system of internal accounting standards and controls consistent with the requirements established by the relevant applicable anti-corruption laws.

In negotiating the joint venture agreement, the joint venture partners will make their best efforts to include into the agreement provisions, clauses, representations, and warranties along the following lines:

1. The joint venture should adopt and maintain an effective internal control system and a compliance programme for the prevention of (i) corruption, money laundering, and other corruptive practices. and (ii) of any forms of restrictive practices by the joint venture itself or between its partners, as long as they are actual or potential competitors on one or more related markets. It is recommended that the agreement explicitly refers to the anti-corruption provisions laid down in the ICC Rules on Combating Corruption (2011).
2. Each partner should supervise and monitor the implementation and effective operation of the joint venture’s internal control system and compliance programme, and promptly inform each other partner of any potential deficiency or red flag that is identified.
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3. The joint venture should provide that it (i) will act in compliance with applicable anti-corruption and antitrust laws, the joint venture’s internal control system, and the joint venture’s compliance programme; and (ii) will not pay directly or indirectly bribes to public officials or their family members or to shareholders, partners, or members of the corporate bodies of the counterparts with which the joint venture proposes to operate.

It is recommended that the joint venture systematically makes use of the ICC Anti-corruption Clause (2012) in its commercial contracts (see Chapter 16 of this Training Handbook).

4. Each partner should commit that its principals, who will carry on activities directly or indirectly related to or on behalf of the joint venture, (i) will act in compliance with applicable anti-corruption and antitrust laws, the joint venture’s internal control system and the joint venture’s compliance programme and, (ii) will not pay directly or indirectly bribes to public officials or their family members or to shareholders, partners, or members of the corporate bodies of the counterparts with which the joint venture proposes to operate.
5. Each partner²⁶ should give a statement or commitment:

• that neither this person, nor its family members, nor its principals, are public officials, who are directly or indirectly related to the activities to be carried out by the joint venture;
• to promptly inform the other partner if, after the signing of the joint venture agreement: (i) the person, or any of its family members, or any of its principals are appointed as public officials and, as public officials, they will be directly or indirectly related to the activities to be carried out by the joint venture; and (ii) of any event that could influence the circumstances pertaining to the person’s own position or that of its family members or that of its principals as represented to the company. Written confirmation of the above should be provided on a yearly basis or on the company’s request.

6. Each partner should ensure that no public official who is directly or indirectly related to the activities to be carried out by the joint venture, or its family members, will be appointed as a director of the joint venture or be hired by the joint venture as an employee, consultant or external consultant, intermediary, or agent.
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7. There should be a veto right for the company over the joint venture’s decisions concerning the execution of agreements with, or otherwise the use or hiring of, intermediaries or business partners that (i) will perform lobbying activities on behalf of the joint venture, (ii) will endeavour to obtain regulatory approvals, or (iii) will in any way deal with public entities or will have contact with a public official for or on behalf of the joint venture.
8. Each partner should designate one or more person(s) who shall act as the partner’s representative(s) in the joint venture or should undertake to designate such representative(s); such representatives should have an outstanding reputation for integrity, have an appropriate level of seniority, and possess the necessary skills in the field of internal control systems.
9. Each partner should cause its representative(s) to sign and adhere to the ethical commitments contained in the joint venture agreement.
10. There should be a right to perform an audit on the joint venture, or on the joint venture’s operator, in the event the company has a reasonable belief that the joint venture or the joint venture’s operator (in its activities directly or indirectly related to the joint venture) may have violated any relevant anti-corruption and antitrust laws or any of the anti-corruption commitments set out in the joint venture agreement.
11. There should be appropriate provisions to protect the company against the risk of violation of the anti-corruption clauses in case of a change of control of any of the partners.
12. The non-transferability of the joint venture agreement, or any of the obligations or rights contained therein, by the partner to third parties without the company’s prior written approval.
13. The right of the company to terminate the joint venture agreement and to obtain compensation for damages in case of breach by the partner of the anti-corruption obligations, representations and warranties contained in the joint venture agreement, or in case of violation of anti-corruption laws.

Depending on the circumstances of each transaction, the Manager should seek the advice of the Anti-corruption and Antitrust Support Unit before modifying or waiving any of the provisions, clauses, representations and warranties listed above. If the Manager is proposing any such modifications or waivers, he or she shall specify the reasons in writing for evaluation by the Anti-corruption and Antitrust Support Unit which, if necessary, shall suggest possible actions to alleviate specific concerns.

The final draft of the joint venture agreement should be sent by the Manager to the Anti-corruption and Antitrust Support Unit, which shall check that it complies with the requirements set forth in the joint venture policy and applicable anti-corruption laws. Only then can the joint venture agreement be signed.

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4 IMPLEMENTATION OF THE JOINT VENTURE AGREEMENT

The company’s representative(s) are responsible for the implementation of the joint venture agreement. They will have received comprehensive training on anti-corruption compliance.

The company representative(s) should be appointed for a limited period of time, ideally no longer than three years. Any decision to keep the representative(s) in place for longer than the regular period should be documented and the reasons clearly stated.

The representative(s) are responsible for:

• Ensuring that the joint venture and the joint venture’s partners operate the joint venture with diligence, transparency, honesty, integrity, and in compliance with applicable laws, and in line with the joint venture’s internal control system and its compliance programme;
• Monitoring – with the support of the Anti-corruption and Antitrust Support Unit – the effectiveness, efficacy and adequacy of the internal control system and compliance programme adopted by the joint venture and, if necessary, proposing changes to the compliance programme in order to maximize effectiveness and help ensure continued compliance;
• Monitoring the relationships with the joint venture’s customers and counterparts, especially when they are public entities;
• Monitoring that the joint venture shall not act as a device for facilitating collusion between the partners in the related markets, where they are actual or potential competitors; and
• Monitoring – in particular – the relevance, necessity, legality, and correct execution of any agreement with intermediaries or business partners that act for or on behalf of the joint venture.

The representative(s) should promptly report to the Anti-corruption and Antitrust Support Unit any red flags that are identified in relation to the activities carried out by the joint venture or to the activities carried out by its partner(s), the partners’ representatives, directors, managers, and employees in connection with the joint venture. They should immediately alert the Anti-corruption and Antitrust Support Unit of any inadequacies, gaps, or suspected violations.

In addition, the representative(s) should be required to submit a periodic report (at least annual) to the Anti-corruption and Antitrust Support Unit on the activities carried out to fulfil the responsibilities indicated above. This report should be submitted to the Anti-corruption and Antitrust Support Unit which will evaluate it and, as appropriate, provide assistance, and suggest actions to address specific concerns.

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About the author

Massimo Mantovani is General Counsel and a member of the Executive Committee of Eni, the largest Italian corporation and one of the largest integrated energy companies in the world, with 79,000 employees and activities in 85 countries. He graduated in Law at Università Statale di Milano and gained a Master’s in Law from King’s College, University of London. He is admitted to practice law in Italy (avvocato) and England (solicitor). Since 2011, Mr. Mantovani participates in the B20 Working Group on Improving Transparency and Anti-Corruption and is a regular speaker at national and international conferences and in postgraduate courses on compliance issues. From 2005 to October 2012 he was a non-executive member of the Board of Directors of Snam, an Italian listed company, and is currently an independent member of the Board of Directors of University of Bologna ‘Alma Mater’.

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The following guidelines may be used as a basis for reviewing and verifying the information collected through the due diligence questionnaire and throughout the due diligence process. They will also serve to identify and document any unethical or suspicious conduct of a potential joint venture partner. Additional investigations may be required in certain circumstances.

• Relevant names and identification: As a first step, start by reviewing the potential partner’s registrations and other documents to identify its full name, related entities (for instance parent company, subsidiaries, branches, and affiliates) and principals (including owners, directors, and officers representing the partner).
• Official registry of organizations: Most official registries of companies and other organizations make their records available to the public in some form. Check the ownership of potential partner’s companies, its directors, accounts, and other relevant official documentation. Furthermore, if the owner is a trust company, check, to the fullest extent possible, the ownership of this company.
• Financial references: Request that the official registries provide the financial statements (including the balance sheet and profit and loss statements) for the last three years of the potential partner and its related entities (in particular, the holding company and the subsidiaries) and verify, when possible, their completeness and accurateness. If audited financial records for the previous three years are not available, an independent third party may be requested to certify the potential partner’s reliability, financial capabilities, and probity.
• Qualifications and membership of professional bodies: Review the curricula vitae of the principals, executives, managers, or key employees related to the contractual activity to be performed by the potential partner and verify, when possible, the information disclosed; in particular the experience and qualifications of the individuals concerned should be verified through relevant professional associations, Internet or by contacting their former employer, when deemed useful or necessary.
• Electoral records, local government business records: Local government offices and business libraries usually make available to the public records of individuals (for instance from electoral rolls) and businesses (for instance from local business directories). Verify that the potential partner is recorded at the address given.
• Criminal records: Check criminal records of the potential partner, of its related entities (parent company, subsidiaries, branches, and affiliates), and (if legally permissible in the country concerned) of its principals and key management personnel.
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• Debarred or restricted parties lists: Information about companies and individuals barred from bidding on local, national, or international contracts can be found through media and Internet searches. For example, the World Bank’s website²⁷ provides a list of debarred companies and individuals that have been sanctioned under the World Bank’s fraud and corruption policy for bribery or corruption in bid processes.
• Credit rating: There are a large number of international and local commercial organizations offering credit rating services on individuals and organizations on a fee-paying basis. Other facilities, including public registers and online listings, also provide information about bankruptcy or insolvency of individuals and companies.
• Business history: Identify through Internet, financial statements and other sources, the business history and experience of the potential partner. Use business references provided by the potential partner in the due diligence questionnaire to verify the information found.
• Past experience with your company: Review the list of joint venture agreements that the potential partner currently has, or had in the past, with your company. Subsequently, contact relevant personnel in your company to request documentation relating to previous due diligence efforts conducted on the potential partner, as well as information regarding the potential partner’s conduct in performing such agreements, including any red flags and other issues.
• Media and Internet: The use of free or subscription databases provides a simple and cost-effective way to find relevant information about a potential partner. Use a reputable search engine, search each name associated with the potential partner and narrow the search using appropriate terms such as: bribe, crime, charge, corruption, fraud, slush fund, black money, or money laundering. Review the results, identifying and printing any articles (i) that implicate the potential partner, its related entities or principals in an inappropriate activity; (ii) that indicate government services/employment or ties to the government or to public officials; or (iii) that provide information that appears to be inconsistent with the information obtained through the due diligence questionnaire. Verify, if possible, such information through other sources (including embassies, consulates, chambers of commerce).
• Anti-corruption measures: Check the official website of the potential partner and of its related companies and search for codes, policies, and procedures addressing business ethics, anti-corruption compliance, and gifts and hospitality policies.
• Antitrust decisions: Competition authorities usually provide on their websites details about pending cartel investigations and final decisions. From these sources, a track record of the partner’s attitude towards antitrust compliance can be drawn.

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The following are some of the red flags to watch for during the due diligence process and throughout the negotiation and implementation of a joint venture agreement. The presence of one or more red flags does not mean that improper conduct by the potential partner has already occurred or will occur. It does mandate, however, greater scrutiny and the implementation of appropriate safeguards.

• The circumstances in which the potential partner (called hereafter ‘it’) was identified or introduced are unusual or abnormal (for instance it was the only available partner; it was introduced by someone who may have a conflict of interest; it was strongly suggested by a government customer or a public official).
• It carries out its business in a country or in an industrial sector with a reputation for corruption.
• It, or any of its principals, is domiciled or is a resident of a so-called tax haven or of a country with a perceived high rate of corruption.
• It, if a company, has an unusual corporate structure or was only recently incorporated.
• It is involved or has been proposed for no apparent good reason.
• It is duly registered but has no activity, it has no or only limited staff and its business address appears to be only a letter box.
• It is owned by or employs a public official or a family member of a public official.
• It, or any of its principals, has a conflict of interest, has a questionable reputation, has been debarred or blacklisted, or has been investigated, prosecuted or convicted (especially in the case of corruption related offences, money-laundering or fraud).
• It presents a history of unexplained or inadequately explained breakup of association with other companies.
• It has a desire to keep the relationship secret or requires its identity not to be disclosed.
• It insists on having sole control of any host country government approvals.
• It (or a third party representative) suggests that it can make special arrangements with regard to the decision-making or action process at stake.
• It refuses to commit to compliance with the anti-corruption laws.
• It does not have an adequate internal control system nor adequate procedures for the prevention or identification of corruptive practices or refuses to implement them.
• It refuses to provide information requested during a due diligence review process.
• Its business scope does not appear to be consistent with the scope of the joint venture.
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• It does not have adequate resources to support the joint venture or has a questionable financial situation (for example: annual turnover and net assets are less than the services provided, significant losses, financial statements not subjected to an independent audit, discrepancies, or inconsistencies in the financial statements).
• It has no or only poor experience in relation to the contractual activity.
• It requests that the returns under the joint venture agreement be paid: (i) in cash; (ii) to an entity or individual other than itself; (iii) into a bank account registered in a country that is not the country where it resides or where the joint venture operates; or (iv) into a ciphered bank account.
• It requests an unusual transaction structure or wishes to include incorrect or unnecessary cost items or false documentation.
• It requests unusually large payments, or payments that appear excessive and not justified.
• It gives incomplete or inaccurate information in required disclosures for invoices or other documentation.
• It is regularly involved in large cartel investigations in countries where antitrust laws apply.

This list is not exhaustive. Other circumstances may arise suggesting that a corrupt or anti-competitive activity is about to occur. These should also be immediately reported to the Anti-corruption and Antitrust Support Unit.

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