Third parties and the FCPA

This article follows up on Part III of this series, FCPA compliance principles, to deal with the Foreign Corrupt Policies Act problems raised by agents and distributors. Because agents and distributors are used so often by many companies in the automotive sector, no compliance program can function unless it successfully deals with these intermediaries.

The starting point for hiring agents, consultants, distributors and other third parties is due diligence intended to verify that there are no red flags indicating that the third-party intermediary may be corrupt. There are three basic goals for any due diligence inquiry: (1) to weed out, to the extent possible, people or firms who are likely to make bribes (or to be otherwise unsuitable for the job contemplated); (2) to document how hiring decisions were made, and why; and (3) to establish that, in the event a violation later occurs, there was no way that the hiring firm could have known about it because the agent or distributor was carefully vetted.

While the nature of the review may vary, depending on the identity of the intermediary, the nature of the circumstances, and other facts and circumstances, the following are steps to consider:

• Contacting any references provided to make certain that they actually exist and are willing to vouch for the character of your agent or distributor.
• Contacting the country desk at the State Department, the commercial attaché at the US embassy in the foreign country and that country’s business desk at the Department of Commerce, and asking whether they have any records of improper conduct by the agent or distributor.
• Conducting a basic background check using Dunn & Bradstreet or similar services, and consulting the U.S. Department of Commerce Commercial Service.
• Checking local databases and/or police records to help determine if the person has a history of being involved in illegal or improper activities. If such resources are not available, local investigatory agencies may serve the same function.
• Establishing written procedures governing how to hire sales agents or distributors.

One key due diligence goal is to establish that the agent is being properly compensated given the level of responsibility and work required. Doing so serves more than just the business purpose of not overpaying for services rendered, for a payment that is far in excess of what should be required suggests the possibility that the agent is dividing up the proceeds from the arrangement with a government official. A common way to evaluate the reasonableness of compensation is to construct a set of benchmarks within the country at issue, or in countries that are otherwise comparable, for similar work. Of course, this approach works better where the agent is performing relatively simple, often-hired tasks. Nonetheless, the approach does provide some guidance for complicated transactions even if the company cannot determine the exact level of “comparable” work.

Given the importance of due diligence, it is surprising how often multinational firms are haphazard with the results of their due diligence. Companies should not just gather due diligence; they should analyze and summarize it. An adequate summary would note both the positive and negative information gathered and state with particularity how each negative element was handled. It is best if companies keep all information gathered for at least five years after the relationship with the agent or distributor at issue has ended.

Once a potential agent or distributor has been identified, many companies will request a signed, written questionnaire responses providing basic information, including: (1) the nature of the agent’s or distributor’s organization, when and where it was incorporated or registered to do business and the names of all principals in the organization; (2) a statement that there are no government officials who own or are paid by the intermediary or, if there are, a full disclosure of their names and positions; (3) a copy of the agent’s or distributor’s most recent fiscal report; (4) a statement regarding whether any of the principals or employees are seeking political office; and (5) a statement regarding prior government positions held by the agent or distributor, or employees of same.

An additional key step is to use tightly worded contractual provisions to provide additional safeguards against FCPA violations. The following are provisions for firms to consider in intermediary contracts:

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• The intermediary is an independent contractor with no authority to commit violations of the FCPA.
• The intermediary is aware of the requirements of the FCPA and agrees not to commit any actions that would cause an FCPA violation. It is best if the clause explicitly state that the intermediary agrees not to pass on any bribes to foreign officials and not just reference the Act.
• The intermediary is not an employer, officer or representative of the foreign government, nor a candidate for office. Companies often require that the intermediary warrant that it will not run for office without first notifying the US firm and allowing it to take appropriate steps in light of this change in status.
• The intermediary will not assign its rights or duties under the agreement without prior written consent of the US corporation.
• The intermediary agrees to allow the issuer’s accounting firm to review the intermediary’s books.
• The intermediary will conduct all purchases pursuant to an itemized list of expenses and in writing. All reimbursements will occur pursuant to check or wire transfer, never in cash.
• The intermediary agrees that certain expenses, including gifts to any government official exceeding $100, or expenses over a certain amount, will be paid by the intermediary only after it gets approval from the US corporation.
• The intermediary will keep accurate books that show the expenses, the person to whom any payment was made and a detailed and accurate description of the services, with the company having the right to audit the intermediary’s books to satisfy itself that no payment has occurred.
• The US company will be excused from performance or payment if it has any reason to believe that there is any violation of either the US or the foreign company’s anti-bribery laws, with the agreement becoming void ab initio.
• The intermediary will notify the U.S. firm if there are any relevant changes in facts, such as a member of the firm becoming a government official.

Although there is only one FCPA, there is no one correct approach for creating and implementing an FCPA compliance program. The Department of Justice and the Securities and Exchange Commission expect that companies will give a great deal of thought to the best way to implement the FCPA’s requirements in light of the particular circumstances and the industry involved. For companies with frequent exports and operations abroad, like many in the automotive sector, the implementation of an effective FCPA compliance program that is executed faithfully is one of the best means to minimize the risk of an FCPA prosecution.