US-based investors have been expanding their presence in Latin America, and as the opportunities grow, investors are being confronted with additional risks associated with making investments in this region.
We were recently involved with an investor that made an investment in a company based in Brazil. The investor was unaware that the Brazilian company had an established relationship with local inspectors to whom the company paid bribes to avoid being fined or shut down for any shortcomings on building violations. The Brazilian company also had quiet agreements with authorities that would hand out contracts for money.
To address these issues, the investor drafted and implemented a corporate compliance program for which all the employees of the Brazilian company would adhere. The company then diplomatically communicated to the authorities and inspectors that bribes would no longer be the accepted norm.
While knowledge of the rules of the Foreign Corrupt Practices Act (FCPA) is essential, background checks on the company and principals in which you are investing are also an important part of due diligence.
You need to know the principals of the company are not involved in any criminal behavior and have not received negative media attention that may impact the public perception of the company. Also, you need to know the company has not had financial troubles or other issues that would affect your deal.
Further, because public record information is limited in Latin America, contact should be made with the US Embassy and local law enforcement (or through firms with access to these sources) to gather as much intelligence as possible on the company and its principals.
The scope of the background checks should also include an assessment of the company’s history of compliance with local regulations, such as payment of taxes, corporate registrations, and appropriate licenses for the particular type of business.
Lastly, while the Department of Justice has increased its focus on compliance with the FCPA, it is important for private equity firms and other investors to avoid accepting payments from or making payments to third parties. In Latin America, third party transactions are vulnerable to, depending on the country, Informal Value Transfer (IVT), Black Market Peso Exchange (BMPE), Money Laundering (trade based) and, of course, violation of the FCPA. Banks involved in international financial transactions are always monitoring business and personal accounts for these types of activities. In Venezuela, IVT is used to circumvent the strict currency controls put in place by the Chavez regime while Colombian and Mexican drug cartels exploit BMPE to launder drug proceeds.
All of this means private equity firms should exercise caution when making an investment in Latin America. But caution, in this vein, equals information and awareness. As with all other types of deals, intelligence is your advocate.
Kenneth Springer is a former special agent with the US Federal Bureau of Investigation and the President and Founder of Corporate Resolutions. Springer is also the author of “Digging for Disclosure: Tactics for Protecting Your Firm’s Assets from Swindlers, Scammers and Imposters.”