How the relationship with U.S. partners and banking institutions is handled may be as relevant as the local criminal case.
By Alexander Aizenstatd
A simple press release about a criminal investigation against a company or one of its directors can have serious consequences, and if the company has a relationship with a financial institution in the United States, it can permanently damage it. It could even close the doors to the U.S. banking market if appropriate action is not taken.
It is increasingly common for companies to have points of contact with the United States, whether through banks providing financial services, customers or major suppliers. These in turn, are increasingly aware of the legal or reputational effects that their relations with companies in Central America may have. This is particularly important when the Central American company or some of its directors are the subject of a criminal investigation.
Some sophisticated U.S. entities, especially financial ones, have compliance departments comprised of professionals whose task is largely to reduce the entity’s legal and reputational risks. These risks are not only limited to the conduct of their officers, but also include the conduct of their customers or suppliers abroad. Under the Foreign Corrupt Practices Act (FCPA), a U.S. entity may be subject to significant fines, or even jail for improper acts in which it is involved abroad. At the same time, foreign entities can be fined in the United States. No company wants to risk being involved in such cases. But this is not limited to U.S. companies alone. Nine of the ten highest sanctions under the FCPA have been imposed on foreign companies. Sanctions are significant. The highest at the moment, imposed on Petrobras in 2018 was for 1.78 billion dollars. Therefore, compliance departments take this risk seriously.
It is not only the risk of sanctions under the FCPA, or participation in a criminal conspiracy that motivates compliance departments to be extremely cautious, it is also the reputational risk. For a bank, a press release about its relationship with a customer that is subject of a criminal investigation can negatively affect is share market price, even if it is only a customer. When a relationship with a Central American customer does not represent significant income for the company, but can represent a significant cost in terms of reputation, compliance departments will be more averse to the risk of continuing that relationship. For some, that may mean a lack of access to the U.S. banking system, or the loss of a significant customer. That’s why the measures the company takes in the face of a criminal investigation are indispensable to prevent further harm. Here are some recommendations.
Compliance departments generally monitor media news about their clients or partners and may obtain information about the investigation or accusation, or they may find out through other contacts in the country. Sometimes even prosecutors issue press releases or hold press conferences, and the compliance departments are on the lookout for these. The company should not wait for them to find out from one of these reports. If managers already have information about the investigation or allegations and believe they are relevant enough to risk the relationship, they should actively seek out their counterparts in the United States to inform them of the facts before they hear about it from the press. Even if they feel that the allegations have no further basis or may be misrepresented. One thing is the presumption of innocence as a legal principle and another is the risk they are willing to take. The compliance department may not want to take that risk and decide to cut the relationship before giving them a chance to explain, so the approach must be made soon. Also, one should consider that press statements or press releases are not always accurate. If the communication is not direct, it will be difficult to explain those inaccuracies later. If in an exercise of transparency and trust, the approach is made before they find out through the compliance department, that will make the news not come as a surprise, and it also allow executives who deal with the company on the business side to explain the entity’s position before the compliance department makes a decision. Compliance departments are reserved and will have no relationship with outside companies, so it’s important to move the information through the business side initially.
When dealing with financial institutions it important to be the first source of news. The Central American business culture sometimes encourages little external communication with the aim of preventing risks, that attitude in this case is a disadvantage. It’s best to go directly to them, to take the initiative and convey the situation, before they find out about it through other means. It is a sign of honesty and that the relationship is valued. In the end, it is what one would also value if in the position of the compliance department.
Such transmission of information ideally should be through a personal visit and if possible, request that someone from the compliance department be there as well. The information transmitted should be honest and reliable, verifiable by third parties. There is little point in making the first approach if the information is not entirely true, or if it is exaggeratedly optimistic. It must be transmitted in a simple, concrete and accurate manner. In order to do this, it is essential to have in your team a legal professional who knows both the Central American and the American legal systems, and who can communicate in both English and Spanish. Ideally, they should have some experience that gives them legitimacy in the eyes of the third party. This lawyer should not be related to the acts being investigated in the company and will not be the in-house lawyer of the company. The in-house lawyer may accompany you if necessary, but an objective external vision is ideal. A third party will be more objective and will be able to fulfill the purpose of transmitting information to safeguard the relationship without making an absolute defense of his employer. Sometimes you will have to issue reports to share with compliance departments, hence your objectivity will be valued.
Depending on the complexity of the issue and its possible points of contact with U.S. law it may be recommended to hire the services of a law firm in the United States as well. Firstly, to analyze the risks that may arise from the case, but secondly to act as interlocutors with U.S. compliance departments. It is important to keep in mind that the company must be transparent with these advisors and take into account that the firms themselves have compliance departments. This means that the issue can be an obstacle for them taking you as a client. Hence the importance of having a local attorney who is familiar with the Central American and U.S. context.
After the first contact with the bank, client or supplier, other periodical updates must be made, which depending on the case may be monthly or according to some important advance in local cases. It is important that these updates are constant, if possible in person and accompanied by some material that documents progress in the cases or reports of the lawyer hired for the purpose. It is important that contact be maintained even when there is no significant change to report.
The communication must be in good faith. These means not underestimating the work of the national authorities, so the blame must not be place solely on judges or prosecutors. This only weakens the legitimacy of the communication. It is possible to highlight technical errors, but not to dismiss everything as a political attack, even if the case contains some of those elements. The company may issue clarifications on inaccurate press releases or statements by the authorities, but neither the company nor its directors should engage in smear campaigns against the authorities involved in the case.
In addition to communication, the company must take internal measures. Investigate, separate the directors involved when it is prudent to do so, implement genuine policies that avoid future cases such as those under investigation, even when they have not occurred. It is not just a matter of communicating, but of proving that the company is taking effective measures that demonstrate its commitment to maintaining high standards of integrity, including compliance with laws and cooperation with authorities.
Each case will be different, but in my experience the most important thing is to treat the counterpart in the same way you would expect to be treated if you were in their place. U.S. companies understand that a manager can be the subject of an investigation or an accusation and that doesn’t necessarily mean he or she is guilty, but they in turn have to be accountable to their own compliance departments and shareholders. That’s why honest and transparent communication, before the news reaches them by other means, opens the door and gives them room for maneuver to presume good faith. A criminal case can take several years and may even be resolved favorably in many cases, but if the company does not take the necessary steps to protect its relationship with its U.S. counterparts, by the time it resolves the case it might be too late. Facing these situations head-on and honestly, with the help of an experienced outside counsel can prevent something already difficult from turning into something much worse.