This is the seventh in a series of articles intended to assist organizations in assessing their anti-corruption programs through the lens of the 10 hallmarks of an effective compliance program as set forth in “A Resource Guide to the U.S. Foreign Corrupt Practices Act” (“the Guide”), jointly published by the U.S. Department of Justice and the Securities and Exchange Commission in November of 2012. This article centers on hallmark number seven:
Third-Party Due Diligence and Payments
The vast majority of FCPA enforcement actions involve bribery payments made by third parties, as opposed to those made directly by employees or officers. While the Guide makes mention of what might be termed the “usual suspects” (i.e., sales agents, consultants and distributors), there are a wide range of business intermediaries who may be interacting with foreign officials on your behalf. Still, the Guide is the most detailed document coming out of the U.S. government on the subject of third-party due diligence since the publication of Opinion Procedure Release 08-02. Given the potentially devastating implications of failing to get third-party due diligence right, this is the hallmark to which we have dedicated the most attention.
In essence, the Guide states that while due diligence may and should vary depending upon the degree of risk and other factors, “some guiding principles always apply.” These guiding principles are summarized below:
1. Qualifications and Associations
What is the third party’s business reputation and relationship, if any, with foreign officials? How long has the third party been in business, and is the proposed relationship consistent with its business experience? Equally important considerations include whether other companies were considered, whether there was a competitive bidding process and whether the company was “recommended” by a foreign official.
2. Business Rationale
Why is it important to the company to include the third party in the transaction? What is the role of and need for the third party? Ensure the contract terms specifically describe the goods or services to be provided. Other important considerations under these guiding principles are payment terms, including how they compare to typical terms in that industry and country, and whether there is anything about the timing of the third party’s introduction to the company that may call into question the motives and legitimacy of the business rationale. Often, after long pursuit of a business opportunity and perhaps a bureaucratic delay (real or orchestrated), a government official may suggest retaining a consultant to help usher the process along through bureaucratic processes. The timing of the bureaucratic snarl and the introduction of the consultant could be a way for the foreign official to exact an improper payment through his undisclosed ownership and cooperation with the consultant he is urging you to retain.
It is also a good idea to confirm and document that the third party is actually performing the agreed-upon work and that compensation is commensurate with the value being delivered.
3. Ongoing Monitoring
The Guide suggests that ongoing monitoring may include “updating due diligence periodically, exercising audit rights, providing periodic training, and requesting annual compliance certifications by the third party.” The DOJ and SEC are also interested in whether the company has informed third parties of the compliance program and the company’s commitment to ethical and lawful business practices, and whether it has sought assurances that they, too, are committed to ethical and lawful business practices.
4. The Eight Essentials of a Third-Party Anti-Corruption Program
You won’t find these in the Guide, but the “Eight Essentials” of a third-party anti-corruption program are scope, sponsorship, justification, collection, certification, scoring, contracts and communication.
Determining Program Scope
The first step in conceptualizing a third-party anti-corruption program is determining which categories of third parties are “in scope.” Frequently, companies make a “bright line” distinction between “business intermediaries” and “suppliers” and focus most if not all of their attention on business intermediaries. While suppliers certainly may represent a spectrum of compliance risks, most do not represent high corruption risk since they don’t typically interact with other parties on a company’s behalf.
A business intermediary is a commercial entity or individual who represents your company in the marketplace in some way and may interact with foreign officials as part of that role. This category includes many of the usual suspects who frequently violate the FCPA, such as sales agents, consultants (often sales agents in sheep’s clothing), distributors, freight forwarders and customs brokers. But the category is considerably broader than just those types of businesses. Doing this preparatory scoping work will provide a very strong foundation for the third-party program that follows.
Business Sponsors
The designation of an internal business sponsor as the responsible party for each third party deemed to be within the scope of the program is a critical success factor for any third-party anti-corruption program. Often, the business sponsor role defaults to the person advocating for the company to engage the third party or renew its relationship with an existing third party. Under a third-party anti-corruption program, this individual takes on added responsibilities, including that of the company’s “point person,” whose role includes ongoing communication to the third party regarding program requirements and an acknowledgement that, by playing the role, this person is putting his or her personal reputation on the line and accepting responsibility for the relationship – including if anything goes awry. Business sponsors are your first line of defense, so they need to be keenly aware of the risks that third parties may represent in general, and also the specific risks among the third parties for which they are individually responsible.
Justification
While much of this essential element comes from the business sponsor who must lay out the business case for the proposed relationship, the review process undertaken by legal and/or compliance must likewise consider the justification in support of the proposed relationship in comparison with potential risks that have been identified when weighing whether to approve the relationship.
Data Collection
In the not-so-distant past, the data companies collected from commercial partners was quite minimal. This data shortfall must be addressed if your organization is to have even an adequate third-party anti-corruption program. The best and most efficient way to collect richer data about commercial partners and associated control persons is to require them to complete a questionnaire. While questionnaires vary in depth and length, they should, at minimum, seek to collect information and include the following components.
- Descriptive Data
- Relationship Data
- Questions and Answers
- External Data
Certifying to the Anti-Corruption Program
While you have control of the third party’s computer screen when they are completing the questionnaire, it is prudent to use the opportunity to get them to make certain representations as part of your overall efforts at driving accountability. Many organizations include language in their questionnaires such as “I have read, understand and agree to abide by [your company’s] anti-corruption program.” Obtaining further representations that they will not pay or solicit bribes and commit other violations of any law are also advisable, as is having them certify to your anti-corruption policies and program on an annual basis.
Risk Scoring
Think of your third-party anti-corruption program as a series of funnels. You apply the first funnel to your overall third-party population in determining which entities should be within the scope of the program. Risk scoring can be used as the second funnel. By using objective risk scoring criteria to apply a numeric score to different risk attributes within the description, relationship, questions and answers and the watch list risk categories, you can further narrow your focus.
Written Agreements
Part of the eye-opening experience of getting ready to implement a third-party anti-corruption program occurs when you learn how many of your existing third-party business partners are either not subject to any form of written agreement or the agreement that is in place makes no mention of the third party’s anti-corruption obligations to the company. Remedying this situation can be a painstaking process. Ultimately, the goal should be to have in place with each third party a contract that includes specific language indicating the third party’s agreement to abide by the company’s anti-corruption policy and to not pay or solicit bribes in any form.
Training
While many organizations provide some level of anti-corruption training to their employees, officers and board members, few extend that training out to third-party business partners. Given the fact that the vast majority of FCPA violations are committed by third parties, it would seem prudent to provide anti-corruption training to this very important extension of your business and reinforce your message that bribery of any kind is unacceptable.
If your third-party anti-corruption program includes these eight essential elements, it will, over time, very likely lower your exposure to potential bribery and corruption violations.
This article is part seven in a 10-part series exploring Anti-Corruption and the 10 Hallmarks of an Effective Compliance Program. Each piece in the series is based on a section from a whitepaper published by Protiviti, titled “Viewing Your Anti-Corruption Efforts Through the Lens of the Hallmarks of an Effective Compliance Program.”
