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Know the risks before teaming up in a joint venture

Don Procter
Know the risks before teaming up in a joint venture

Anyone thinking of teaming up in a joint venture (JV) should be prepared to do a thorough risk assessment of potential partners and monitor all the players for the project’s duration to avoid a host of possible problems, including corruption, fraud and anti-competition practices.

That’s the key takeaway from a webinar on ethical issues to selecting JV partners held during the 13th annual national symposium on Managing Risk in Construction Contracts and Projects presented by the Canadian Institute.

It is no secret the construction industry sees more than its share of corruption around the globe. The most common corruption risk is through a third party because anti-corruption laws often hold a partner liable for the actions of third parties if they are acting on your behalf, said Amee Sandhu, founder and lawyer for Toronto-based law firm Lex Integra.

The need for due diligence isn’t exclusive to Canadian companies working with partners overseas, added Sandhu, noting companies working globally with the best-in-class ethics-in-compliance programs don’t lessen their standards when working on Canadian soil.

Before choosing a JV partner, look for red flags through an Internet search on the company, Julianna Fox, chief ethics and compliance officer with WSP, told the webinar viewers.

She said also prepare a standard questionnaire for prospective partners with core questions that cover a possible history of corruption, anti-competition or conflict of interest issues.

You can get ideas for your questionnaire by looking to the RFP and from sources such as the Canada Integrity Regime which offers examples of appropriate wording for questions, she added.

Sometimes a phone conversation with the prospective partner is enough to address concerns but if there are serious red flags such as corruption allegations, consider retaining a third-party service provider to investigate, Fox said.

Doing your homework also includes a review of all the players, not just the JV partners, she said. That includes subcontractors and suppliers.

There have been cases of subcontractors using forced labour in Ontario, Fox said, noting it could pop up on a reputation check you do before retaining them.

She told the session’s audience there are companies that specialize in conducting various levels of due diligence reviews of third parties.

Sandhu said if an investigation is required into a JV, consider hiring one company for the job, rather than have each partner hire their own. She pointed to a case where each of the three companies in a JV retained separate firms to investigate allegations of corruption in one firm.

It “can really slow things down.”

Once a partner is selected due diligence doesn’t stop, she stressed. The JV agreement must contain a raft of points to ensure all parties meet their obligations. For example, consider including a prohibition against corrupt practices, audit rights as well as termination rights if a partner’s audit warrants ending the relationship.

Sandhu added due diligence should not be limited to checks from corporate offices. Train workers in the field to monitor the site for “suspicious behaviour” such as alterations in the original payment structure. Balloon or cash payments are examples.

“People all of a sudden showing up in fancy cars” is another red flag, she told viewers.

Important also is that all employees get the same ethics training, Sandhu said. A third-party hotline for employees to report potential violations can help but it should be made clear who will investigate and get copies of the findings.

In an audience polling at the webinar, 50 per cent of the viewers indicated they have due diligence processes in place to evaluate potential JV partners.

“I am very happy to see that 100 per cent (of the viewers polled) consider ethics in their commercial risk assessment” of potential partners, said Sandhu.

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