Lafarge & Acquisition Due Diligence – Beware of Sanctions Risk in High-Risk Jurisdictions
On October 18, 2022, the U.S. Department of Justice (“DOJ”) announced that Lafarge S.A. (“Lafarge”), a Paris-based global manufacturer of building materials, along with its subsidiary Lafarge Cement Syria (LCS) S.A. (“LCS”), pleaded guilty in the Eastern District of New York to charges of conspiring to support foreign terrorist organizations, a violation of the Anti-Terrorism Act (“ATA”).
Lafarge and LCS conspired to pay the U.S.-designated foreign terrorist organizations ISIS and the al-Nusrah Front for the right to operate a cement plant in Syria from 2013 to 2014, which enabled LCS to collect approximately $70.3 million in revenue. Per DOJ, Lafarge executives viewed their payments to ISIS as a form of tax. Company executives used intermediaries, personal email accounts, and falsified company records to cover up the payments. Lafarge was ordered to pay a total criminal fine of $90.78 million and a forfeiture money judgment of $687 million, for a total financial penalty of $777.78 million.
DOJ called Lafarge’s crimes “staggering.”
In 2015, an entity called Holcim Ltd. (“Holcim”) acquired Lafarge. Two years later, the successor entity, LafargeHolcim, issued initial findings of an independent internal investigation commissioned by its Board of Directors reporting that company personnel had engaged in dealings with armed groups and sanctioned parties during 2013 until the plant closed in September 2014.
Significantly, despite the company’s investigation and public report, in October 2022, DOJ took the position that the acquiror did not conduct pre- or post-acquisition due diligence on Lafarge’s Syrian operations, did not self-report the conduct, and did not fully cooperate in the investigation.
DOJ’s categorical rejection of the acquiror’s disclosure efforts emphasizes the requirement that entities operating in high-risk jurisdictions actively take steps to assess and react to risk, whether it be risk posed by terrorism, corruption, or economic sanctions. Absent comprehensive pre-acquisition (and, if not possible, post-acquisition) risk assessment and due diligence, acquirors cannot intelligently price the acquisition target’s value.
In particular, the Lafarge case illustrates the extent companies with operations in high-risk jurisdictions must be aware of increasing ATA-related risk, including the risk of civil litigation. 18 U.S.C. § 2333(d)(2) provides a private right of action for persons injured from “an injury arising from an act of international terrorism committed, planned, or authorized by an organization that had been designated as a foreign terrorist organization” against “any person who aids and abets, by knowingly providing substantial assistance.” Recent cases, including Kaplan v. Lebanese Canadian Bank, SAL, 999 F.3d 842 (2d Cir. 2021) and Atchley v. AstraZeneca UK Ltd., 22 F.4th 204 (D.C. Cir. 2022), suggest an increasingly permissive judicial landscape with respect to permitting ATA-related aiding and abetting claims.
In this environment, acquisition targets are advised to set up, and acquirors should demand, risk-based, effective, efficient compliance controls. For example, systems designed to "Know Your Supplier and Distributor," similar in design and borrowing from "Know Your Customer" disciplines required in the banking industry, are fast becoming a normative regulatory requirement, and thus are increasingly expected in all manner of transactions.
Creating such controls helps counterparties price risk exposure and provides comfort that high-cost post-acquisition liabilities will not surface. Compliance controls governing anti-corruption, anti-money laundering and sanctions, including potential terrorist-related sanctions, distinguish sophisticated businesses from their competition and make it more likely that these businesses will not only be able to close transactions but do so for maximum value.
For further information please contact:
- Arthur D. Middlemiss at email@example.com or +1.212.826.7001
The foregoing is for informational purposes only. It is not intended as legal advice and no attorney-client relationship is formed by the provision of this information.