Third Party Due Diligence: When is Enough, Enough?

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1 Third Party Due Diligence: When is Enough, Enough? FCPA Enforcement Third parties continue to be the focus of FCPA enforcement actions FCPA Guidance emphasizes importance of risk based due diligence Companies must establish and adhere to written due diligence policies and procedures Third Parties and the Ties That Bind Agents: Stand in the Shoes of the Company and Represent the Company Secure foreign government contracts Regulatory approvals, immigration papers, customs clearance and other services Distributors: Resell Company s Products (on consignment or purchase) Sub Agents and Sub Distributors: More in the Chain Vendors/Suppliers FCPA versus UK Bribery Act (differentiators) Consultants, Lobbyists, Professionals Nominees and Local Representatives 1

2 Remember the Law and Key Terms Knowing payment (or thing of value) will be given to a foreign official Knowing = person is aware of a high probability of the existence of a circumstance (unless the person actually believes that such circumstance does not exist) Liability extends to those who purposefully avoid actual knowledge head in the sand problem, known as conscious disregard, willful blindness or deliberate ignorance Unjustified obliviousness to any action (or inaction), language or other signaling device that should reasonably alert them of the high probability of an FCPA violation Due Diligence Goal: To Negate Corrupt Intent Documentation of due diligence steps and good faith Identify relevant risks or red flags Follow up investigation of relevant risks or red flags Remediate identified risks Documentation of review and conclusion Build in advice of counsel in non routine cases For (almost) every problem, there is a solution What Are Red Flags? Circumstances which indicate an increased risk of corruption Red flag risk = Government cites as evidence of willful blindness Due diligence process has to identify and resolve all red flags 2

3 Centralized Versus Local Decision Making Companies are delegating due diligence function to local offices Liability of due diligence requirement is too great a burden Risks for misconduct increase when control over third party process is delegated Ideal centralized review ensures consistent standards are applied and difficult to replicate in de centralized model Initial Identification and Justification Sponsor of third party and how did third party come to the attention (e.g. Saudi Arabia) Business Justification and specific services third party will provide (e.g. contracts, logistics, export/import, immigration)? Continuous process, healthy for business History and length of relationship with third party Compensation structure (e.g. commission, retainer) Annual compensation over last ten (10) years Payment method used Questionnaires Start with basic questions and tailor to specific circumstances and risks Background: Personal and family information, education and business history Looking for prior history of misconduct, government relationships/connections Use business references (easy to bolster case) Release/consent form (data privacy) Make sure candidate signs form to certify information Confirm party s willingness to comply with anti corruption laws (in past and in future) Conduct telephone interviews of business references 3

4 Common Red Flags Allegations or reputation of corruption or misconduct Large or unusual compensation arrangements (Audit) Former foreign official or close ties to foreign official Lack of transparency of ownership structure No track record in industry Limited access to information (BVI Registration) How to Resolve Red Flags and Risks? Additional Factual Investigation Representations and Warranties Contractual Modifications Focused investigation (Level A) Advice of Counsel Enhanced investigation (Level B) Factual Investigation Additional factual investigation to reach conclusion/resolution of issue Ask the third party specific questions and document response Include or prohibit sub agents Utilize focused Media Research Make credibility determinations 4

5 Contractual Provisions to Reduce Risk Add in specific requirements to reduce risk Restrict geographic area Restrict interactions with government officers or officials Describe services in detail and bolster justification (why this 3rd party?) Require detailed invoices and withhold payments if insufficient Proactive Risk Reduction Verified invoices and payments Monitoring Additional training and monitoring Require participation in training program (or existence of comparable compliance program and training) More than annual certifications Additional compliance reminders Update and renew due diligence Agent and Distributor Codes of Conduct Office, Country or Region Specific Compliance Program Reviews Focused Due Diligence Document why you hired company Boots on the ground Local familiarity Local records check Inspect and photograph local facility Interview local individuals for reputational evidence Review draft report before it is finalized 5

6 Documentation, Documentation, Documentation Prepare a due diligence file for each candidate Due diligence file is a running log of the due diligence process Build a file which contains every piece of information and every action taken File should include, at appropriate points, approval of attorneys for action proposed and taken Important Guidance Precedent FCPA Guidance hypotheticals are instructive Company A, a US issuer, hires a local distributor to sell Company A s products to a government agency in a high risk country. Red flags: Distributor requires a significant discount or rebate to cover its costs of support services. Distributor requests use of a local partner which includes a foreign official from another part of the foreign government. While there is nothing inherently illegal about contracting with a third party that is recommended by the end user, or even hiring a government official to perform legitimate services on a transaction unrelated to his or her government job, these facts raise additional red flags that warrant significant scrutiny. Further diligence to examine the relationship among the three parties and written representations and warranties from the foreign official concerning his or her role in the transaction. Kreller Group Thomas Engelhart Director, Global Investigations tengelhart@kreller.com x104 kreller.com 817 Main Street, Suite 300 Cincinnati, Ohio