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International Franchising and the FCPA (Part Two): A Flock of Foreign Officials

This post continues from Part One: Vicarious Liability. There are several types of foreign officials that interact with a franchise’s broad array of potential agents abroad, which generates anti-corruption risks.

For example:

Health and wage compliance officials: The potential for corruption may arise during routine health inspections or wage and hour compliance determinations, as both require the involvement of local government officials.  For example, a large food franchisor once disclosed at a conference that it investigated an issue in Eastern Europe regarding local labor officials asking for alcohol and cigars in exchange for stamping franchisee employee time cards. Even for small things of value supported by local tradition, franchisors (and franchisees, etc.) must be wary of the FCPA risks.        

Intellectual property officials: As the franchising model relies heavily on goodwill and consistent brand quality across units, protecting trademarks and other intellectual property in foreign markets is extremely important. Maintaining intellectual property rights can also present corruption risks. Corrupt activity by franchisor intermediaries with intellectual property (IP) officials could be attributed to franchisors, even if it involves IP rights used only in a foreign market. For example, in a non-franchise but relevant distributorship case, the DOJ entered into a deferred prosecution agreement with AGA Medical (a heart device maker), where one of the company’s Chinese distributors, among other activities, bribed an official in order to secure patent rights for AGA in China.  

Utility officials: Interactions with local utility officials present corruption risks. For example, IKEA, a furniture franchisor based in Sweden, told the press about potential extortion and bribery in its system regarding Russian electric power officials in 2010. The scheme involved an alleged agreement by IKEA for a contractor to bribe the electric officials in order to keep the power on at a franchised store. According to the New York Times, the two executives implicated in the bribery worked for IKEA’s largest franchisee at the time, IKEA Group.  The executives were dismissed. Just because IKEA did not face a public anti-bribery enforcement action doesn’t mean other franchisors will be so fortunate.      

Procurement officials: Obviously, franchises that try to sell directly to government procurement officials must watch for corruption risks. A significant example is the Daimler case. Daimler AG, based in Germany and owner of the Mercedes-Benz brand, franchises auto dealerships around the world, including in China. Daimler was involved in several elaborate, multi-jurisdictional bribery schemes, mostly to obtain government contracts for Daimler vehicles. 

In Daimler anti-bribery enforcement actions, authorities focused on subsidiaries. However, holders of the “third party accounts” Daimler used for bribery included dealers — some of which were likely franchised — and distributors. Daimler franchises many dealers in China, where the company bribed employees of state-owned entities. It is difficult to tell if particular accounts were held by franchised dealers; the DOJ’s sentencing memo said that accounts were maintained with “absolute confidentiality.”  There is also no public information on whether or how particular actions taken by any independent dealer affected Daimler’s deferred prosecution agreement terms. However, Daimler China (a wholly-owned subsidiary) recently criticized independent Chinese Mercedes dealers for lackluster sales. Particularly in growing markets, franchisors should be careful about exerting sales pressure on franchisees, due to the increased incentives and opportunities for corruption. 

Other officials: Opportunities for franchisees and intermediaries to interact with various other foreign officials abound. For instance, franchisees in foreign markets usually require supplies through customs, and many FCPA cases involve customs officials. In addition, food and retail franchisors and franchisees often seek outlets at airports and military bases, where powerful officials might demand improper things of value in order to secure the location.

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In the final post of this series coming next, I’ll discuss best practices for international franchising and anti-corruption compliance.

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Erik King is a Law Clerk/Contractor Attorney with Lockheed Martin supporting a government client. He focuses on deceptive trade practices and financial-related fraud (often with cross-border dimensions), and is interested in international law and regulatory compliance. The opinions expressed herein are solely those of the author in his individual capacity, and in no way reflect the views of Lockheed Martin or the government. Erik can be contacted here.

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