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· 2 min read
FlaggGRC

All acquired companies and potential M&A targets of US companies, a call for caution or a chance to act?

The US Department of Justice (DOJ) has introduced a policy to incentivize acquiring companies to self-report misconduct within acquired companies. The DOJ has adopted a transformative approach, placing a stronger emphasis on transparency and accountability with the introduction of the Voluntary Self Disclosure: DOJ's new Mergers & Acquisitions Safe Harbor Policy.

Acquiring companies stand to gain various benefits, including the presumption of a decision not to prosecute, if they promptly and voluntarily disclose any misconduct within the acquired entities within 6 months of the closing date, regardless of whether it was discovered pre or post-acquisition.

The DOJ emphasizes, "... We are placing an enhanced premium on timely compliance-related due diligence and integration. Compliance must have a prominent seat at the deal table if an acquiring company wishes to effectively de-risk a transaction..."

Well, a compelling trigger for acquired and potential target companies to revisit and optimize their compliance mechanisms for maximum effectiveness OR even to have one in the first place!!??

Stay tuned to read and know more about our Tech-First GRC platform at FlaggGRC Ventures LLP

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· 3 min read
FlaggGRC

A Quick Look at Import-Export of Legal Services

What is ‘Legal Services’?

  • As per the Services Export Promotion Council (SEPC):

A broad definition of legal services would include advisory and representation services as well as all the activities relating to the administration of justice (judges, court clerks, public prosecutors, state advocates, etc.).

Legal Services is one of the services that the SEPC has been mandated to promote the exports of.

  • As per the Service Tax Rules, 2012, Rule 2 (cca):

“Legal service” means any service provided in relation to advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority.

It’s a Taxable service under Service Tax.

‘Legal Services’ under GATS:

  • The GATS establishes a basic set of rules for world trade in services, a clear set of obligations for each Member country, and a legal structure for ensuring that those obligations are observed.
  • As per the WTO services sectoral Classification List (MTN.GNS/W/120), Legal Services are included under Professional Services.
  • All 149 Members of the WTO must abide by the GATS. It covers over 95% of global trade in services.
  • BUT in no country – any of the advisory or representation roles can be taken unless you are registered at the Bar to practice the Law of that country.

General Agreement of Trade in Services (GATS) covers four Modes of delivery of services in cross–border trade.

Legal Services in four Modes of Supply are as under:-

  • Cross-border Services (Mode 1): Cross border supply of legal services using Technological Services. For example – An Indian Law firm emails a memo to a client that is operating in the USA.
  • Consumption abroad (Mode 2): Purchase of Legal Services in the territory of another country. For example – An Indian Legal firm represents an American client in an Indian Court.
  • Commercial Presence (Mode 3): Expansion of a Legal Firm into another country. For example – An Indian Law firm establishes an office in USA.
  • Movement of natural persons (Mode 4): Law Professionals enter into a foreign territory temporarily to provide services. For example – An Indian lawyer provides Legal services by visiting a client in USA to prepare a business acquisition.

Current Cross-border Status:

  • Gradually, a lot of Indian firms are setting up offices abroad; with the only barriers of language in the non-English speaking countries
  • Prohibition under Advocates Act – if not registered at the Bar Council of India.
  • FDI is not permitted in this sector.

As per the Notification No. FEMA 22 /2000-RB dated 3rd May 2000, issued by RBI under Foreign Exchange Management (Establishment in India of branch or office or other place of business) Regulations, 2000-

Prohibition on establishing a branch or office in India by foreign firms. Permitted only with prior approval of RBI.

  • Many member countries viz US, EC, Australia, Singapore, Japan, China, Switzerland, New Zealand and Brazil have requested India for taking commitment in Legal Services.

Bibliography:

(Please Note: This is only a research based article with the support of the Bibliography mentioned herein. It only provides information and personal analysis concerning the given topic.)

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· 4 min read
FlaggGRC

C for Compliance in Japan Inc.

The presence of globalization can be remarkably witnessed in all the Asian countries including Japan. Automobiles and electronic devices have been the strongest export industries of Japan alluring many companies to set up their offices and units in Japan. More the globalization, trade and commerce, greater is the need for governance, risk and compliance in any market. The cases of non-compliance in the Automobiles Industry have already hit the Japanese market between 2000 and 2002. Needless to say that there is an immense need of a robust compliance programme being run by every company belonging to the Japanese Automobile Industry.

Intensive research of applicable laws and compliance related provisions thereunder is a primary step to achieve the hallmarks of a robust compliance programme. Japan being the Civil law system has well codified laws from the view point of statutory and regulatory compliances. However, on the research front, language is one of the biggest barriers that a foreign company may encounter. Since the Japanese laws are notified in Japanese in its Official Gazette, no official English versions are available. Although the translation industry is well benefitted by providing the online translations of Japanese laws, none of such translated laws are without a disclaimer of it being an unofficial translation. Thus, taking the support of a local lawyer in validating the research of applicable laws and the compliance thereunder definitely brings a legal authenticity to the whole compliance process. A bilingual local lawyer who is able to interpret Japanese as well as English proves to be a great recourse to overcome the language barriers. Apart from the language barrier, there are no other limitations as such while researching on the Japanese laws as the Ministries are well updated with the respective legislations issued by them. For example, The Ministry of Health, Labour and Welfare of Japan have a wide and systematic database of all laws segregated into health, labour and welfare related laws along with the White Papers and Reports.

Some nuances of the Japanese legal system may be useful for an Automobiles Industry in running an effective compliance programme in Japan. Some of the alarming latest amendments have taken place in Competition, Consumer Product Safety and the Corporation Tax Act in the period of 2011 to 2013. The Commercial Code of Japan has been repealed by the Companies Act 86 of 2005 however, some of its provisions continue to apply to the companies. Such partial repeal brings more complicated applicability issues for the Japanese companies. The subsidiary laws are issued under the mother legislation in the name of the Order or Ordinances. Apart from the mother legislation, a separate Ordinance for enforcement of each law is issued by the Cabinet which is equally important to be considered along with the mother legislation. Automobile Liability Security Law of 1956 also requires a critical attention of the companies belonging to the Automobiles Industry in terms of regulatory compliances. Since cross-border trade has been one of significant factors of the Japanese economy, the Foreign Exchange and Foreign Trade laws of Japan are one of the primary legislations while checking the regulatory compliances.

Department of Justice of the United States stipulates nine hallmarks of a robust compliance programme[1]. An IT enabled compliance management solution is the ultimate and most efficient way of meeting with most of these hallmarks. Also, the technical language translation tool facilitated in such compliance management solution may help the local employees of the company situated in the market like Japan’s in understanding the exact compliances. Thus, an intensive research overcoming the language barrier, an IT enabled solution and a support from the local lawyer prove to have a strong and effective compliance mechanism in place across Japan Inc.

[1] http://www.justice.gov/criminal/fraud/fcpa/guide.pdf

(Please Note: This is only a research based article with the support of the Bibliography mentioned herein. It only provides information and personal analysis concerning the given topic.)

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· 6 min read
FlaggGRC

C for Compliance in Japan Inc.

“Good laws have their origins in bad morals” quotes Macrobius, the Roman Writer.

In any legal system, may it be Common as has been adopted by India and the UK or Civil as has been adopted by some of the European countries, the primary origin of any law is a crime or indiscipline in the society. Law is introduced into the society to correct the wrongs and to discourage the wrongdoers from committing the same crimes. In other words, wrongs exist and hence do the laws..!

An example can be cited from a few pieces of legislation from different areas of laws:

In Finance laws, Sarbanes-Oxley Act of 2002 also known as the Public Company Accounting Reform and Investor Protection Act was enacted as a piece of US Federal legislation to ensure the accuracy of the financial information of a corporation, the need for enactment of which arose from a series of corporate and accounting scams. Similarly, in the domain of labor laws, the laws related to abolition of bonded labor, contract labor, etc. were introduced based on the need of protecting rights and interests of these labors.

These examples clearly suggest that enactment of laws has many a times been a corrective step towards the elimination of indiscipline in the society. Such corrective action by way of introducing stricter laws should ideally reduce the number of such crimes and indiscipline in due course of time. However, in spite of this corrective action, the newspapers and media are still able to earn their bread and butter everyday relying upon increasing number of scams and crimes happening in the society. Thus, it is clear that a mere corrective action is not enough and the situation calls for a preventive step in the first place. “Prevention is better than Cure” goes without saying. The need of an hour is a tool that prevents a person from committing the very action of crime and indiscipline in the first place and to give secondary importance to a corrective action i.e. enactment of sanctioning codes to cure the scenario. In view of this necessity, Compliance and Ethics management has proven to be very efficient and effective while serving as a preventive tool for indiscipline in the society.

Compliance simply means the act of complying with the applicable statutory as well as regulatory legislation. The term ethics is a set of morals and principles that a person possesses without any interference of legislation. Michael Joesephson, the President and Founder of Josephson Institute of Ethics, clarifies the difference by defining these terms as “Compliance is what we must do; ethics is about what we should do”. Compliance management can be termed as the process of identification of compliance and implementing it in such manner as required by law. Compliance and Ethics management, as a tool, has proven its efficiency not only with respect to a single natural person but also for an artificial person i.e. a corporation. Due to a huge number and complicated nature of the compliance that a corporation has to comply with, Compliance and Ethics Management is indeed primarily customized and best suited for a corporation. The tool enables a corporation to focus on achieving its goals and targets when its legal compliance are completely taken care of by this tool and the non-compliance are prevented at every stage of its functioning.

Compliance and Ethics Management program as an efficient tool of prevention of any non-compliance may be reaffirmed by citing a recent case of Non-prosecution Agreements (NPAs) entered into by Securities and Exchange Commission (SEC) with one of the Argentine Companies. Non-prosecution Agreements are the written agreements that are entered into by the SEC in which the SEC agrees not to take any enforcement action against the entity if it agrees to co-operate fully and truthfully with the investigations. It entered into such NPAs with one of the Argentine companies in relation to the settlements of violations under Foreign Corrupt Practices Act (FCPA). SEC chose to put this tool of NPA to use due to this Company's prompt initiative in reporting of its non-compliance. The Company was able to take such an initiative primarily since it implemented Compliance and Ethics Management Program in the organization. The non-compliance and misconducts were discovered by the Company as a result of adopting measures to improve its worldwide internal controls and compliance efforts, including implementation of an FCPA compliance training program in Argentina. The SEC took into account the significant remedial measures undertaken by the Company, including a comprehensive new compliance program throughout its operations. Among Company’s remedial measures have been new compliance training, termination of employment and business arrangements with all individuals involved in the wrongdoing, and strengthening its internal controls and its procedures for third party due diligence. The Company also conducted a risk assessment of its major operations worldwide to identify any other compliance problems. The Company has ceased operations in Argentina. Thus, Compliance-oriented steps taken by this Company and SEC’s decision of entering into NPAs with the Company only reiterates the efficiency and effectiveness of the Compliance and Ethics Management as a preventive tool.

Benjamine Disraeli, a former British politician opines “When men are pure, laws are useless; when men are corrupt, laws are broken”. This can be interpreted as a fact that the laws remain as mere corrective written instructions for maintaining discipline in the society. It is indeed the process of managing compliance and ethics that prevents this indiscipline from occurring in the society in the first place. It is the Compliance and Ethic Management that prevents the very enforcement of sanctions given under the laws against a person and its aftermaths. Though, the strength and potential of the Compliance and Ethics Management tool is highly untapped at the moment, the cases such as that of the Argentine Company will soon reveal its hidden significance and bring metamorphic change in any legal system.

(Please Note: This is only a research based article with the support of the Bibliography mentioned herein. It only provides information and personal analysis concerning the given topic.)

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· 5 min read
FlaggGRC

Dodd-Frank Section 1502 – Conflict Minerals: Still a great deal of work!

A quick glance at the corporate world ABCs and you will find that most often than not, C stands for Compliance. And Compliant is what you strive to be as a company. However, in our pursuit of compliance, we may tend to overlook the other C that also stands for Conflict. It has become inconceivable since last two years to think that Compliance can be achieved without paying adequate attention to Conflict minerals requirements, more so when the month of June approaches. It’s also noteworthy that companies do not seem to have gathered much experience or clarity although it’s a second year of filing.

The US Dodd-Frank Wall Street Reform and Consumer Protection Act (Sec 1502) adopted an amendment in the form of Sec 13(p) of the Securities Exchange Act of 1934 which provides for the annual reporting of products containing Conflict Minerals to the Securities Exchange Commission [SEC]. The minerals notified as Conflict Minerals by the SEC are 3TG (Tin, Tantalum, Tungsten and Gold) minerals which originate in the Democratic Republic of Congo and the adjoining countries (Covered Countries). The provision applies to manufacturers as well as the issuers who “contract to manufacture”. The disclosure is mandatory only for the products for the functionality or production of which the use of Conflict Minerals is necessary. The Regulations issued by the SEC with respect to the Conflict Minerals discusses this new disclosure requirement in detail and gives us the Final Rule.

While we all understand the intention of the Congress to inhibit the ability of armed groups in the Covered Countries to fund their activities by exploiting trade in Conflict Minerals, we must also appreciate the use of securities laws disclosure requirements chosen by the Congress to create greater public awareness towards the source of the issuer’s Conflict Minerals and to promote the exercise of due diligence on the Conflict Mineral supply chain. However, such an amendment is anticipated to be one of the biggest challenges in making the company compliant with this latest disclosure requirement. Given the enormous chain and wide spread of suppliers for each manufacturer, tracing the suppliers through all its tiers and reaching the origin of these minerals seems to be neither feasible nor practical for the issuers. Anticipating this at the stage of drafting, the SEC’s Final Rule relies on a reasonable design and good faith execution approach in tracing the origin of Conflict Minerals without stipulating any legal steps and measures for doing so. However, the attempt of the Commission to base the inquiry of the country of origin on reasonableness and good faith has not been of much help to the issuers, the reason being the chances of disapproval of the parameters of reasonable inquiry by the SEC at the time of filing the Conflict Mineral Report, when the issuer may be helpless and will not be able to do much about it. The SEC has not laid down any parameters of reasonableness except certain clauses such as ‘the issuer need not necessarily hear from all its suppliers as long as it does not ignore warning signs or other circumstances indicating ... originated in the Covered Countries’ without stipulating even a vague figure for this exemption. Upon being requested by commentators to at least formulate due diligence guidance for issuers, the SEC agreed but also recommended the issuers to take recourse to the OECD Guidelines which are more recognised internationally. The disclosure requirement for each issuer starts from identifying the products for the functionality and production of which 3TG is necessary, however, it does not stop at due diligence of the supply chain but goes on to include an independent private audit of the Conflict Mineral Report before filing it with the SEC. In addition to this complex set of requirements, the fact that the first Conflict Mineral Report was due to be filed with the SEC by May 31, 2014 took a toll on all the issuers.

Subsequently, in the year 2014, as a result of the decision given by the U.S. Court of Appeals for the District of Columbia Circuit in the legal action against SEC’s Final Rule, the SEC issued a statement wherein pending the further action, it struck off the IPSA, Independent private-sector audit requirement unless a company voluntarily describes a product as DRC conflict free. However, the challenge remains in determining the company conflict free although the transition period is provided by the SEC.

Thus, on the one hand, the amendment of the SEC Conflict Minerals disclosure requirement sheds some light on the humanitarian impact of industrialisation by reinforcing corporate governance of the SEC’s issuers whereas on the other hand, such amendments constitute a great deal of work to be done by the issuers in a relatively shorter frame of time. Having said this, the Rule is making companies more vigilant and aware of their supply chain and proves as a check on companies’ risk management capabilities.

(Please Note: This is only a research based article providing personal analysis concerning the given topic.)

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· 4 min read
FlaggGRC

Google Antitrust Probe in the EU and US

When there is a market, there is competition. In fact, a market is made up of several competing players in the same domain which give/offer a variety of choices, innovations, prices and quality levels to a consumer. Most jurisdictions have introduced Competition and Anti-trust laws to protect the interests of consumers and promote competition by preventing anti-competitive agreements and business practices. Strict enforcement of Anti-trust laws is the key to open and free markets. The unbundling or break-up of a company is one of several strict actions that antitrust regulators can take to stop the company from abusing its dominant position in the market. The term is a burning issue occupying a huge space in the media for the last few days after the European Parliament was expected to call for the unbundling or break-up of Google Inc. for its alleged dominant business activities.

The search engine giant is being investigated for its alleged anti-trust activities by the European Commission since the last 4 years. The EU through its press release of 30 November 2012 had declared initiation of proceedings which was followed by complaints from other search engine service providers.

While this action was being taken by the EU, Google’s competitors in the US had already charged Google with anti-trust-related allegations before the Federal Trade Commission. The company faced multiple allegations of abusing a dominant position in online search through various methods. Google was investigated by the Federal Trade Commission following the complaints received by the Commission from Microsoft Corp., MyTriggers.com, FairSearch, Yelp, etc. of the main allegation was that Google was unfairly downgrading its competitors from the search-engine results to direct users towards its own competing products. The investigations went on for 2 years and Google Inc. was given a clean chit by the Commission. The Commission through its Press Release of 3 January 2013 stated that “the evidence the FTC uncovered through this intensive investigation prompted us to require significant changes in Google’s business practices. However, regarding the specific allegations that the company biased its search results to hurt competition, the evidence collected to date did not justify legal action by the Commission…..The evidence did not demonstrate that Google’s actions in this area stifled competition in violation of U.S. law.” The decision of the Commission was highly criticised by the rival complainants. However, the Commission mentioned in its Press Release that “FTC’s mission is to protect competition and not individual competitors”.

Although Google Inc. is now free from anti-trust allegations in the US, the decision of the European Antitrust Regulator is still pending. The four-year old investigations have now taken such a turn that Andreas Schwab and Ramon Tremosa, the European Parliament members recently revealed a draft resolution proposing the separation of search engine services from other commercial services, which might ensure a level playing field for competitors. This move of unbundling or breaking-up a company is opted for as a measure by regulators when they conclude that the company has become anti-competitive. The draft resolution proposing unbundling is still in the form of a motion and is currently being debated by the European Union Legislators.

Although Google is undoubtedly a dominant player in the search engine services, it is necessary to determine whether it uses unfair means for retaining this position over other competitors. The question of whether the European Parliament will be able to directly enforce ‘unbundling’ over Google Inc. still persists. Although the answer is no, the resolution is likely to pressurise the European Commission to impose unbundling on Google. Can a body of politicians take over the investigations from the regulator and influence the regulator in their decision of the case? On the contrary, the resolution passed by the European Parliament members is likely to benefit the business community in Europe and hence, the Parliament members can also influence the regulator with a view to achieving a positive result. Let us hope however that this unusual stand of the European Parliament does not set a precedent. Whether Google Inc. is convicted by the EU regulator or not the decision must not be influenced in any manner much like the FTC in the US.

(Please Note: This is only a research based article. It only provides information and personal analysis concerning the given topic.)

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