Vetting Partners: A Key Compliance Element
By Michael X. Marinelli and Renee A. Latour
Vetting vendors and other partners is a critical element of a comprehensive export compliance program.
The recent upswing in Foreign Corrupt Practices Act (FCPA) prosecutions and much greater penalties for export control violations increases the importance of rigorous due diligence for all companies doing business with partners.
Following a thorough and well-documented due diligence process invariably will prove worthwhile, both in avoiding prosecution, and, if prosecuted, in providing protection in the face of charges predicated upon alleged violations by agents or distributors.
As a starting point, even basic diligence can be revealing. In this Internet age, a wealth of public media can be reviewed in a short time, and may provide actionable information. More than one company has found that a quick Google search will reveal enough information to avoid engaging an unscrupulous agent. A thorough vetting process should strengthen confidence that channel partners will not be a source of business or compliance exposure.
Under the FCPA and U.S. export control and International Traffic in Arms Regulations and Export Administration Regulations, liability for the actions of a channel partner can be established if the company knew or had reason to know of those actions. The government can establish knowledge by showing that a company: had positive or affirmative knowledge of the improper behavior; had knowledge of facts that make it highly likely that the improper behavior has occurred or will occur; or was willfully blind, meaning that it disregarded obvious indicators of a potential problem.
Increasingly, the government is taking the position that failure to conduct adequate due diligence on partners equates to willful blindness, which it in turn equates to “knowledge” of the partner’s bad acts.
Government investigations of export and FCPA violations frequently work up the chain from the actions of an agent or distributor. Often, occurrence of an illegal act is apparent, and the only question is whether the U.S. exporter was aware of it. Absent a “smoking-gun” e-mail or damning chain of circumstantial evidence, the course of the investigation will turn on the existence of disregarded red flags and the quality of the company’s due diligence.
Government investigators generally start with the proposition that a company knew what was going on. What this means is that the government will demand proof that a company in fact lacked knowledge.
Obviously, proving a negative is always challenging, but much less so when the company can affirmatively point out steps it took to investigate and monitor partners. This requires: written procedures for vetting of all partners; effective audit and other monitoring of required procedures; and retention of due diligence records for at least five years.
Procedures also should incorporate follow up to ensure that the vetting process was carried out, either through spot-checks or more formal compliance audits or reviews. Inconsistency, or failure to follow company procedures, will often expose the company to suspicion, and worse.
While there are some steps common to all sound due diligence programs, there is no one-size-fits-all vetting procedure that will cover every situation or every company.
How much due diligence is enough will vary for each company, and each situation, as well as the products and countries involved. Most important — but not exhaustive — are the products sold, geographic markets served, nature of the sales process and sales cycle duration.
Some of the steps every company can and should consider include the following:
Michael X. Marinelli is a shareholder (firstname.lastname@example.org) and Renee A. Latour is an associate (email@example.com) in the Greenberg Traurig LLP government contracts and export controls practice group. The views expressed are solely those of the authors.
- Clear advance understanding of the business criteria desired in a partner;
- Rigorous review with proven, reliable business references;
- Rigorous public source review of the prospective partner;
- Effective FCPA and export compliance contract provisions in all agreements;
- Exhaustive internal and third-party analysis of all potentially credible negative media reports and other red flags; and
- Well-organized retention of all records of due diligence efforts.