Companies Must Resist Temptations to Cut Corners
By Renee Latour and Jennifer Maki
Current economic challenges have forced companies to take cost-cutting measures to protect the bottom line.
Some may be tempted to sacrifice needed compliance-related due diligence measures or skirt risk assessments that should be standard operating procedure for all prospective international business transactions. Others may pursue unfamiliar offshore business opportunities, or relationships with unknown or less-trustworthy foreign partners, agents or third-party intermediaries.
These cost-cutting measures are wrong. Management must counter any temptation to cut corners that could result in violations of the Foreign Corrupt Practices Act (FCPA).
Throughout 2009, the Department of Justice and Securities and Exchange Commission project continued aggressive investigation and enforcement of FCPA. Penalties for violations include billions of dollars in fines as well as criminal sentences.
Thorough evaluation of all prospective foreign partners, agents and third parties should be conducted before ever engaging in international business. The same applies to any targeted international merger and acquisition company. Myriad factors complement a thorough risk assessment review. While the extent of the due diligence may vary, some factors are a must.
For example, firms must always screen parties to any international transaction against various U.S. government-administered lists of prohibited and restricted entities. In addition to the customer/end-user, U.S. companies must also screen marketing agents, consultants, distributors, joint venture partners, freight forwarders, shipping lines and insurers, and financial institutions, including intermediary or advising banks.
Due diligence screening should also assess the personal and professional reputation of prospective partners. Even Internet searches often can uncover key information. Due diligence reviews should also assess the foreign country’s reputation for corruption, which is periodically rated by organizations such as Transparency International. In addition, links to foreign governments or political parties, parliaments, royal families and multinational organizations should be fully analyzed. If possible, a due diligence review should evaluate the referral source for a potential party, with heightened scrutiny of any foreign government referrals.
Companies must also be attuned to potential red flags when entering into agreements with foreign parties. Many warning signs are just plain common sense: foreign parties that lack any experience in a particular industry; requests for exorbitant payments or commissions; refusal to execute agreements with standard FCPA provisions; blindly signing FCPA terms that would compel some inquiry if taken seriously; or evasiveness as to dealings with a foreign government. A scenario such as a foreign government demanding the use of a certain local entity partner should trigger scrutiny.
Companies also must have effective measures to identify, approve, negotiate with, pay, and monitor all foreign representative and third-party activities — especially activities that entail any payment or receipt of money. Further, the company’s own internal accounting must be accurate and transparent or it may risk violation of the FCPA’s “books and records” provisions. At a minimum, agreements with foreign representatives and other third parties should include the following FCPA-related certifications and clauses:
• The foreign party is fully familiar and in compliance with the FCPA, as well as all local laws pertaining to anti-corruption;
• Payment by company check or wire transfer to the party’s place of business in the country where work is performed;
• Documented support for expense reimbursements and audit rights;
• No contract assignments absent prior written approval; and
• An integration clause, barring any existing or future side agreements.
Mergers or acquisitions require additional FCPA considerations, including a thorough review of all of the target company’s written anti-corruption and FCPA compliance procedures, record retention policies, training requirements, level of training and sophistication of any new employees accompanying the deal, and, finally, an in-depth understanding of all open or pending investigations or proceedings.
The acquiring company also should carefully review the target company’s procedures for paying agents, as well as have a full understanding as to the quality of due diligence the target employed before retaining any FCPA-relevant agents. Of course, a full review of the target’s books and records for compliance-related issues is critical.
In conclusion, cost-saving measures that do not jeopardize compliance should be sought out and applauded. However, any short term savings that derive from shortcuts that increase risks, either in terms of non-compliance, reputation, or damaged business relationships, will neither save money nor protect the long term interests of the company.
Renee Latour and Jennifer Maki are attorneys in the government contracts and export controls practice of Greenberg Traurig, LLP in Washington, D.C.