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Look Before You Leap: Anti-corruption Risks in Relationships with Foreign Parties

Posted in International Trade and Anti-Corruption Compliance

Companies choose to engage with foreign parties for a number of reasons – consulting agreements, distributorships, joint ventures, etc.  Whatever the reason for the relationship, a company may get more than it bargained for if it is does not properly consider the anti-corruption risks involved in the arrangement.  The Foreign Corrupt Practices Act of 1977, as amended (15 U.S.C. §§ 78dd-1, et seq.) (“FCPA”), the UK Bribery Act of 2010, and an ever increasing number of other international anti-corruption regimes make it unlawful for certain classes of persons and entities to provide money or anything of value to foreign government officials, or businesses and individuals so intimately associated with foreign governments that they are considered to be foreign government officials, to assist in obtaining or retaining business. Violations can result in significant civil, criminal, and administrative penalties, including disbarment from government contracting. Yet, many foreign parties consider such payments to be merely the cost of doing business.  They are either unaware of these corruption laws or believe that such laws do not apply to them.  But make no mistake, a foreign partner’s actions can lead to big consequences for the U.S. companies with whom they do business.

Under the FCPA and other regimes, a company does not have to know about, or affirmatively sanction, misconduct by its foreign partners in order to be liable.  A company can be liable for anti-corruption violations by a foreign partner acting as its agent, or taking actions for its benefit, merely because it “stuck its head in the sand” and consciously disregarded, or failed to investigate, the corruption risks involved in the relationship.

There is no one size fits all means to eliminate the anti-corruption risks involved in relationships with foreign partners; however, a company can dramatically decrease its risk by taking four simple steps. These steps can take time, however, and may require the assistance of outside counsel. As such, companies are best served to consider anti-corruption issues early on when contemplating a new arrangement.  Companies who have never engaged in an anti-corruption analysis may be well served to contact outside counsel to obtain checklists and other tools or inquire about best practices. If companies identify anti-corruption concerns early, counsel can often mitigate them to ensure that fruitful arrangements can go forward with minimal risk.

1.         Assess the Risk Involved

Not all foreign relationships are created equal.  A company must assess the corruption risks inherent in each partnership by evaluating:

(1)        the countries involved, including (a) their nationality, (b) their potential connections to government officials or entities with governmental ties, (c) who recommended them or how they were selected as a partner, (d) their prior issues with corruption, if any, and (e) their status on any relevant prohibited parties lists;

(2)        the countries involves including their relative level of, and tolerance for, corruption;

(3)        the financial arrangements involved, including the level of payment or commission, how it will be paid, and to whom; and

(4)        the nature of the transaction, including what specific services will be provided, who will provide them, and why they are necessary.

Companies who interact with foreign partners regularly may be wise to develop a standardized risk assessment questionnaire or procedure.

2.         Perform the Appropriate Level of Due Diligence

A company must tailor its due diligence to the level of risk.  Due diligence may be as simple as a self reporting questionnaire or as complex as a full scale audit.  Regardless of the level of due diligence it should be consistent, thoroughly documented, and retained.  Companies who interact with foreign partners regularly may wish to develop standard due diligence procedures or checklists with the assistance of counsel to minimize the costs and time associated with this process.

3.         Obtain an Anti-Corruption Certification

A company should make its foreign partners aware of the anti-corruption laws to which it is subject, its commitment to compliance, and its compliance program, if any.  It should then have its foreign partners certify in writing that (1) they have not engaged, and will not engage, in any inappropriate behavior while acting on behalf of the company;  (2) they are aware of no anti-corruption concerns about which they have not informed the company and they will inform the company of any concerns going forward; (3) they have been truthful in responding to the company’s due diligence questions; and (4) they recognize that anti-corruption violations can result in significant penalties for the company and in termination of their relationship with the company. Companies who interact with foreign partners regularly may wish to develop standard third party or foreign partner certifications.

4.         Memorialize the Arrangement

Arrangements with foreign partners should be memorialized in writing and include at a minimum (1) a description of the services involved, (2) a time frame for completion or contract re-evaluation, and (3) a description of the payment arrangement.

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