Joint Ventures

Potential scenario

Your company intends to operate in a lucrative, new foreign market. Market regulation demands that you operate with a local partner under a joint venture. It is expected that both companies will have an equal share in such ventures.
Cultural differences have made negotiations with the local partner difficult, including different views on aspects of good governance. As your company is eager to enter this new market, it is eventually agreed that your company handles the production, sales and distribution of products and services, while the local partner takes care of administration, including securing of regulatory approvals, tax matters and permits.

I. Understanding the risk

 
 

Not every corruption-related activity is as easily recognised as a luggage stuffed with cash to bribe a public official. Corruption can be far more subtle, making it difficult for employees to recognise it unequivocally for what it is. That is especially the case for business practices that are legal, but can be abused to disguise corruption.

  • Sharing of financial risks or meeting of local laws are typical reasons for companies forming joint ventures.
  • In a joint venture, different business partners collaborate by, inter alia, combining existing business operations, exploring opportunities in new markets, or establishing research and development relationships.
  • Such ventures can take the forms of a new legal entity, or less formal relationships.
  • Members of a joint venture may be individually liable for any inappropriate behaviour made by the venture as a whole, even where one member may be paying bribes without the knowledge of its partners.

II. Recognizing practical challenges

 
 
  • Countries that require joint venture structures to gain local market access also tend to have a reputation for corruption.
  • Foreign companies that must choose a local partner often either have no choice for its partner, or a limited number of realistic candidates.
  • In joint ventures where a multinational teams with a local company, the local company is often charged with operational activities, such as seeking regulatory approvals, negotiating tax matters or obtaining permits. While this makes sense from a practical standpoint, it may also expose the international company to inadequate oversight of its partner’s interactions with local government officials.
  • Similarly, an international company may team with a local partner with lower corruption awareness, or poorer overall governance.
  • Compounding the problem, employees at an international company may be reluctant to impose “western standards” on local joint venture partners.
  • Companies may be tempted to hide behind dedicated agreements for joint ventures, which – inter alia – explicitly prohibit any kind of corruption. However, simply having a contractual agreement is not, on its own, sufficient safeguard against liability. A defence that “I did not know what they were doing” may not stand, where proper due diligence would have uncovered misconduct. Legal provisions concerning “wilful blindness” or “conscious avoidance” include closing one's eyes to the high probability of improper behaviour.

III. Mitigating the risk

 
 

Companies must address joint ventures, where they have effective control, in their anti-corruption programme.
In cases where a company is part of a joint venture over which it does not have effective control, it should encourage other members of the joint venture to adopt anti-corruption programmes consistent with its own.
Additional, practical safeguards should be considered to mitigate the corruption risk from membership of joint ventures, including:

  • Carry out due diligence before entering a joint venture, and repeat this periodically as a part of continuous monitoring;
  • Define how the anti-corruption programme applies to the joint venture, prior to its launch;
  • Ensure that joint venture partners do not have questionable practices or assets;
  • Check whether potential partners are government-owned, given that the distribution of payments to government officials acting as directors or officers of the joint venture could be defined as improper payments;
  • Develop partner buy-in to anti-corruption programmes, for example starting with mutual legal obligations;
  • Consult regularly with local partners, such as business associations, civil society organizations, embassies to be made aware of any issues or concerns.

Training cases

Example 1 & Example 2
[TI UK HTB, Page 33]

Suggested reading

“How To Bribe – A Typology Of Bribe-Paying And How To Stop It”, Section 2.5

"The 2010 UK Bribery Act Adequate Procedures – Guidance on good practice procedures for corporate anti-bribery programmes”, Chapter 7.7

“An Anti-Corruption Ethics and Compliance Programme for Business: A Practical Guide”, Chapter F