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International Franchising and the FCPA (Part Three): Best Practices

This post continues from Part One: Vicarious Liability and Part Two: A Flock of Foreign Officials.

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Third party agents, rather than direct employees, cause many FCPA violations. Franchise systems depend significantly on third party agents to succeed in foreign markets.  Master franchisees often are responsible not only for a single country, but also for an entire region. This could amplify risks for international franchisors, especially in markets with a history of corruption problems. 

During 2014, companies paid the DOJ and SEC more than $1.5 billion in fines and penalties for FCPA enforcement actions — another reason for franchisors to pay attention. Just as franchise systems commit to consistent brand quality regardless of the operator, they should strive for consistent compliance efforts across units in the anti-corruption arena.

To minimize FCPA/anti-corruption liability, some best practices for international franchise system participants include the following:  

  • Franchisors should conduct risk-based anti-corruption due diligence on all prospective franchisees, and require master franchisees to do the same on all prospective sub-franchisees.
  • Provide training and practical anti-corruption guidance for franchisees and other third parties that may encounter government officials or engage in government-regulated activities. Guidance should be concise and user-friendly (not filled with legalese) and translated into the local language(s).
  • Avoid special treatment of franchisees and third party representatives connected to government officials. Government officials might even be a franchisee’s outside counsel. Las Vegas Sands, a resort developer, operated hotels as a franchisee under the Holiday Inn and Conrad brands in Macau. After the franchise agreements were signed, a top Sands executive allegedly paid money to a Macau legislator who was serving as outside counsel to the company. Sands’ Audit Committee said it found likely violations of the FCPA books and records provisions.
  • Ensure that all franchise and sub-franchise agreements have anti-corruption compliance language, including, among other things, termination rights for breaches.
  • Create an anonymous hotline that can be used by franchise representatives overseas to report illicit activities.
  • Require specific descriptions for books and records entries, and itemized bills from third party agents performing services for the benefit of the franchisor or franchisee. 
  • Conduct ongoing monitoring of FCPA/anti-bribery compliance throughout the entire franchise system, including accounting methods.

Franchising is an attractive way to expand a business abroad. However, franchisors must be wary of FCPA and anti-corruption risks, considering franchise systems’ reliance on intermediaries and frequent interactions with a wide variety of foreign government officials.

Although it appears that no FCPA enforcement actions against franchisors for franchisee-related conduct have occurred to date, franchises and similar models have been linked to several important anti-corruption cases. A robust compliance program implemented throughout the franchising process is critical to minimizing risk in this area.

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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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