Producing Content in Emerging Markets

y Simon N. Pulman

As the marketplace for entertainment content becomes increasingly global and the middle classes in the BRICS nations (i.e., Brazil, China, Russia, India and South Africa) become both larger and equipped with greater disposable income, content owners of all kinds are looking exploit their intellectual properties in international markets. As part of this process, content producers are seeking to shoot substantial portions of their films and television shows in the target markets themselves, in order to appeal to foreign audiences in a more effective and authentic manner (e.g., Transformers 4, which shot in several locations in China and is on course to make more money there than in the United States), as well as to take advantage of certain foreign tax credits and subsidies.

However, content producers should be aware that there are very real risks nestled among the benefits of creating content in foreign jurisdictions. In addition to the possibility that foreign partners may be accustomed to different cultural standards and courses of dealing when it comes to negotiation and due diligence, or may feel aggrieved and become litigious once they see the finished product (as occurred with Transformers 4 and several of its brand partners), producers must be aware of their potential exposure to liability under the Foreign Corrupt Practices Act (“FCPA”), as well as under the UK Bribery Act and local laws and regulations focused on reducing bribery and other corrupt practices. Even experienced and honest producers with established reputations for scrupulousness should be aware that in certain countries they may become liable under anti-corruption laws due to an inadvertent mistake, a misguided assumption that business cannot be conducted without making certain facilitation gifts and payments (“if you can’t beat them…”) or the conduct of a third party who is deemed to be an intermediary on the producer’s behalf.

The rise in the international media market coincides with a significant uptick in prosecutions (including a number involving high profile corporations) under the FCPA, which has an extremely ”long arm” and can be enforced by the United States Department of Justice and SEC based on foreign conduct that appears only loosely connected to the United States. Violations can lead to both criminal and civil penalties including hefty fines and imprisonments, and liability can flow down from production entities to individuals. As the New York Times reported in February 2013, the major Hollywood Studios are already aware of the risks – but smaller entities and independent producers seeking to partner with companies in China and elsewhere may not be. Therefore, there are a few threshold points that producers seeking to produce content in emerging markets should be aware of:

1. Tolerance is Down, Enforcement is Up

When producing content outside of the United States, it may be tempting for U.S. producers to defer to their local production partners with respect to what constitutes acceptable practice, and dismiss any suspected corrupt activity as “par for the course” in that country. However, as noted above, investigations and prosecutions under the FCPA have increased recently and U.S. producers must be aware of the risks and accountable both for their own actions and for those of others affiliated with their productions. As further described below, U.S. production companies can be liable for the actions of their entities, and it is also possible for prosecutors to pierce the protection of the corporate or LLC veil to personally penalize principals and employees. As a side note, individuals working for larger companies should also take care because in some countries, there is a possibility that they will be prosecuted individually, but their employer will not. For instance, Brazil’s new Anti-Corruption Statute, which became effective on January 29, 2014, provides for leniency for companies that cooperate with government investigations – but not for their employees.

Producers must also be aware that enforcement of anti-bribery laws and regulations is often uneven. It is possible to become aware of other parties engaged in corrupt activities and illicit payments (sometimes even openly) without repercussion, only to witness a party engaged in similar activities face serious criminal and civil penalties. On occasion, a party may be prosecuted for reasons beyond that party’s control due to greater industry or political forces and in such event, that party may be left facing an overwhelming body of adverse evidence and little legal recourse. In light of the inconsistent application of the law or law enforcement, the only prudent course of action is ensuring abstention from corrupt activities and absolute compliance with the law rather than rolling the dice. As explained below, U.S. producers should effectively communicate this to any local intermediaries or production companies and monitor them to ensure they comply.

2. Scope of Prohibited Activity

U.S. producers and production companies should also be aware that under the FCPA (and under many local statutes as well), the scope of prohibited activity can be significantly broader than traditional monetary bribes. The FCPA prohibits companies and their employees from paying, offering to pay or authorizing the payment of money or anything of value (including gifts, meals and entertainment) or providing any other benefit to a government official covered by the FCPA directly or indirectly, corruptly to induce the recipient to misuse his or her official position or to obtain an improper advantage in connection with the company’s business.

Practically speaking, this means that the FCPA prohibits giving to, or receiving from, government officials favors, services and promises in addition to cash gifts. This could extend to the hiring of a friend or relative of a government official as a production assistant or movie extra at the request of the government official. It also means that providing travel, accommodations, meals or invitations to cultural or sporting events can be problematic, particularly if excessive in value, not consistent with customary business practices, or objectively inappropriate (e.g., “adult” entertainment). Producers should ensure that they educate their foreign partners of what constitutes prohibited conduct, and cause their local production services companies to document any gifts, favors or entertainment carefully.

Of course, U.S. producers should take care to monitor their foreign partners not only during principal production, but also during the financing, pre-production and post-production phases (especially in the event that the producer or its partner is applying for tax credits, official local production status or other favorable treatment from a state or federal body). The risks are greatest in territories where there is extensive state ownership of industry and business, or where the government is closely involved in the funding (and authorization) of the arts and entertainment, as there may be increased incentive to offer bribes in order to receive favorable treatment.

3. Intermediary Liability and Production Services Companies

Even though certain territories have enacted prohibitions against foreign entities exercising ownership or control of production companies, it is common for producers seeking to film a television series or motion picture in a foreign country to engage a local production services company to render physical production services under a production services agreement. This is a potential source of risk for U.S. producers, because a local production services company can be deemed an “intermediary” for purposes of the FCPA, and the FCPA specifically prohibits indirect corrupt payments through intermediaries. Therefore, if a local production company is engaging in bribery in order to facilitate a production, the U.S. production company and individuals can be held liable if they either (i) authorized illicit payments; or (ii) “knew” that the illicit payment would be made by the intermediary. The threshold for “knowing” about bribery is relatively low – U.S .individuals and entities can be held liable if they consciously disregard indicators of corruption or fail to make reasonable inquiry concerning the intentions or activities of their intermediary. For instance, in 2009, the co-founder of the luxury handbag company Dooney & Burke, Frederic Bourke, was convicted under the FCPA when the jury was instructed that Bourke could be found guilty if he was aware of a “high probability” of bribes being paid in connection with a failed energy company transaction but “consciously and intentionally avoided confirming that fact” (he was fined one million dollars and sentenced to prison for a year).

Therefore, any U.S. producer or production company working in a foreign territory must protect itself through both practical and contractual measures. On the practical side, the U.S. production company must conduct thorough due diligence regarding potential partners. This process should involve inquiring regarding industry reputation and ensuring that thorough records are kept (both by the U.S. company and its local production services company) regarding all individuals employed. Where possible, background checks should be conducted. In certain territories such as China, the U.S. producer should also be particularly wary of entering into agreements with individuals who have a relationship to the government as there may be an increased risk of legal exposure. It should be made categorically clear that bribery will not be tolerated and, naturally, any U.S. producer actually traveling to and rendering services in the foreign territory must be vigilant with respect to their own conduct and that of their employees and contractors. Obviously, there must be no line item in the production’s budget for “facilitation payments” or anything similar (as has been known to happen in the past).

On the contractual side, it is imperative that the U.S. production entity enters into a robust production services agreement with the local production services company that causes the local entity to represent and warrant that it will comply with all applicable U.S., international and local laws and regulations, including without limitation, the FCPA and UK Bribery Act. Since the FCPA also prohibits keeping false or misleading records, U.S. companies must also contractually obligate foreign partners to keep detailed and accurate books and records (including expense records, invoices, purchase orders and contracts) and must prohibit the practice, common in certain territories, of keeping dual records (one set of accurate records, one set of falsified records for producing to officials). Contractual protections will not protect a U.S. entity in the event that it is discovered involved in bribery itself, but they may help demonstrate that the U.S. entity had prohibited, and was not aware of, corrupt activities by an intermediary.

Conclusion

Compliance with anti-bribery laws is important for any studio or production company seeking to produce content in an emerging market. Producers should consult with an attorney early in the process and should consider engaging competent local counsel to assist with compliance and due diligence, prior to entering into a contractual relationship with a foreign partner or production services that may be difficult to terminate at a later stage.

This is one area where passivity can be extremely dangerous – U.S. producers must proactively educate themselves and their employees upfront of the relevant laws and risks, implement a compliance plan and select their partners very carefully. Ignoring the issues can expose a production company to liability and place it in a tricky position mid-production from which it is difficult to extricate itself. A production could hypothetically find itself discovering endemic bribery and corruption mid-shoot and facing an impossible choice – whether to conduct an investigation and fire its intermediary production company there and then, at considerable expense (and creating the risk of local retaliation), or continue with the shoot and risk liability under federal and local law. It is far better to understand and address these risks early in pre-production in order to avoid them.

As with all of the blogs on CDAS.com, this blog (“Producing Content in Emerging Markets”) is provided for informational purposes only and does not constitute legal advice.