Joint Ventures and Compliance: Defining the Issues (Part I of III)

jv2One of the more challenging areas in the anti-corruption field is navigating joint venture risks.   Companies rely on joint venture partners for a variety of purposes – local partners know the geographic market, have a specific skill set that integrate well with the company’s operations, and offer a cost-effective means to expand company operations into foreign markets.

Joint ventures create a distinct set of risks that are different from those presented by third-party intermediaries. They both have to be subject to due diligence review procedures but the nature and scope of such review is far different.

The due diligence process has to take into account the different operational framework for joint ventures versus third-party intermediaries.

To put an initial framework together, a number of issues have to be defined. These include:

Purpose: A company has to define the purpose of the joint venture. A joint venture partner could have a distinct set of skills that are needed by the company. In addition, a joint venture partner may be familiar with local market conditions and have exiting relationships in the country. The latter situation presents significant benefits as a more efficient way to expand into a local market but it also presents serious risks. A local joint venture partner is unlikely to have anti-corruption controls or sensitivity to anti-corruption issues. The due diligence process has to account for this factor.

Control: Even in high-risk countries where a joint venture partner has existing relationships with government officials, the nature of the risk can vary significantly depending on the control of the joint venture. For example, a company that enters into a joint venture with a partner that only has 30 percent control of the operations, meaning that the global company makes day-to-day decisions, and that the global company controls the board of the joint venture, reduces significantly the joint venture’s corruption risks.

A local partner may have reduced incentives to engage in corruption if it earns only a 30 percent benefit from corrupt conduct (assuming the decision to engage in bribery is based on rational, cost-benefit analysis). This is a significant factor in any analysis of corruption risks.jv4

The issues become very complicated in situations where control is split equally, 50-50, or where the global company has less than a controlling interest because of local regulatory requirements where local companies are mandated to maintain control of a joint venture.

Functions: A significant, and often over-looked, issue is analyzing the day-to-day operations of a joint venture. For example, a local partner may assume responsibility for compliance with local regulations. A controlling partner should not cede such operations to the local partner because of the potential for bribery. Given that local regulatory interactions can often be high-risk, a global company has to ensure that certain controls are imposed. That may be difficult when there are language or custom barriers to such interactions.   Language can become a natural barrier to exercise of basic controls over jv4high-risk activities. Global companies should not necessarily hire from the local market but they may want to ensure that its managerial employees speak the local language. It is an important issue that should not be ignored.

The joint venture analysis begins with these three different issues. The situations can often be classified based on purpose, control and function. Each combination of these three factors presents a unique set of compliance risks.

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