By Greg Wolski and Virginia Adams
We previously discussed the importance of pre-acquisition due diligence and post-acquisition integration as an integral part of an effective compliance program – as described in the November 2012 joint U.S. Department of Justice and Securities and Exchange Commission Resource Guide to the U.S. Foreign Corrupt Practices Act.
One additional hallmark of an effective compliance program discussed in the guide involves the importance of conducting due diligence on third parties and review of payments to those parties.
Statistics suggest that as many as 90% of recent FCPA enforcement actions involve the use of agents, consultants, sales representatives or other third-party sales intermediaries. [See: EY's 12th Global Fraud Survey]. The number of issues surrounding third parties can be voluminous and complex.
Therefore, strict due diligence and internal controls related to these dealings is imperative when analyzing potential targets for investment or purchase. In our analysis of agent dealings of would-be target entities, we have encountered many unique scenarios, which could be cause for alarm, including the following red flags:
No apparent business purpose for the agent
Companies should periodically evaluate the purpose of third parties, and question the activity of any who work in markets that do not align to an established business development strategy. Companies should establish contracts in writing that require the submission of periodic activity reports and include a description of work performed with specific business contacts. In addition, although payment to a representative may be contingent on completion of a sale, periodic activity reports should be submitted to monitor the affiliations of the business contacts, and up-to-date reports should be required prior to making payments.
Agent claims to be related to government officials
Due diligence should be conducted to determine whether any third party has government affiliations or relationships to government officials. If affiliations with the government are identified, influence over chief decision makers and level of responsibility should be considered.
Agent seeks excessive commissions or discounts
Although commission amounts or discounts may vary depending on a third party’s location or experience, commissions and discounts provided to all third parties should be evaluated on a regular basis. An agent who requests a disproportionate commission or discount may be seeking an indirect method of reimbursement for kickbacks or improper payments that are funneled to government officials.
Agent asks for improper invoices or payments
Contracts with third parties should outline the payment structure, including commission percentages or monthly retainer amounts. Also, if the third party will be reimbursed for expenses, the contract should outline appropriate types of expenses and include spending limits for meals or entertainment provided to government officials. The agent should be required to submit detailed receipts to support the expenses, and the person who approves the invoices should be required to undergo training to identify corruption red flags.
Additional red flags could include scenarios where the agent or third party objects to being audited, refuses to disclose owners, partners or principals, or receives invoices for payment that lack accounting transparency.