Fashion Week 2015 begins on February 12 in New York. Compliance will certainly not be on the agenda and the fashion industry has never attracted the kind of regulatory attention “enjoyed” by industries that rely heavily on public sector sales. But that doesn’t mean that the industry is free of corruption risks and immune from potential FCPA enforcement actions.
Based on a longer analysis that we are preparing for the Fashion and Luxury Goods Industry, we have identified five key risks.
Here’s an abbreviated version of our analysis, with recommendations on how to mitigate these risks.
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Risk 1: Gifts and Hospitality In the Fashion/Luxury industry, where the merchandise is, by definition, expensive, giving away free samples may be risky, especially because the DOJ and SEC take the position that corrupt intent can be inferred from the value of a gift. As the FCPA Resource Guide states, “[t]he larger and more extravagant the gift … the more likely it was given with an improper purpose.”
One need look no further than the recent Avon case, which involved gifts of Louis Vuitton merchandise, Gucci bags and Tiffany pens for an example of the dangers of giving luxury items as gifts. Companies can mitigate the risks associated with gifts and promotional expenses by adopting and implementing policies and controls on gift giving that clearly specify permissible amounts, the circumstances under which gifts may be given and the approvals required for each category of gift and training their sales forces on these policies.
Risk 2: Customs and Logistics Manufacturers have to get their goods to market, which often involves customs clearance. When this task is delegated to local customs brokers and agents, the compliance risks increase exponentially. Think Panalpina and Ralph Lauren. As usual, the key to minimizing these risks is thorough due diligence on third party agents, making sure that fees are paid only for real, tangible services and are calculated at market rates. Ensuring that a sufficient supply of local inventory is always available will reduce vulnerability to extortion by officials who often prey on importers’ desperation to get goods cleared urgently.
Risk 3: Real Estate High-end companies often seek high-end real estate for their offices and stores. These may be in areas subject to various regulations requiring multiple licenses, permits and approvals, all of which present risks. If the property is secretly owned by a government official, excessive rent payments may give rise to a suspicion of bribery. Understanding the local regulatory regime, ensuring that any fees are permitted by local law and commensurate with market rates, due diligence on local counterparties and third-party agents can all mitigate these risks. Developing options in different locations will help to avoid dependence on any particular government official for any particular permit, thus reducing the extortion risk.
Risk 4: Trade Based Money Laundering In “trade based money laundering,” drug money is converted into goods that are shipped to narcotics source countries and sold for cash which is then delivered to drug trafficking organizations. According to FinCEN, the Los Angeles Fashion District is rife with trade-based money laundering and in a recent series of raids on the LA Fashion District, law enforcement officials seized almost $90 million in currency believed to be the proceeds of drug trafficking.
Although this is a bigger concern for retailers than for manufacturers or wholesalers, the latter could find themselves dragged into investigations if they are consistently supplying retailers who are directly involved in trade based money laundering. Distribution network due diligence and monitoring are central to managing these risks. If a company learns that its products are being used in trade based money laundering, it is generally a good idea to inform law enforcement and cooperate in any investigation.
Risk 5: Forced Labor in the Supply Chain This risk is especially great for companies that outsource production to countries with cheap labor supplies and insufficient legal protections for workers. The Obama Administration has made combatting forced labor a priority and DOJ has a number of criminal statutes that can be used to prosecute companies that knowingly profit from the use of forced labor.
California now requires certain companies to file annual statements certifying their efforts to eliminate forced labor from their supply chains and the EU has also issued directives on trafficking and forced labor. In addition, exploitation of forced labor often involves bribery of government officials, including health and safety inspectors, police and immigration authorities. As a result, a forced labor violation is also likely to trigger an FCPA investigation. The reputational risks are no less serious than the legal risks.
These risks are best mitigated through (1) supply chain risk assessments, (2) due diligence on suppliers and labor agencies, (3) on-site audits of manufacturing locations, and (4) requiring labor suppliers to sign and abide by codes of conduct that oblige them to comply with all applicable labor and employment laws, to treat workers with dignity and respect and to ensure that all workers are over the age of 16 and meet all minimum age requirements.
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If you’re interested in receiving more information on any of these issues, please contact the authors.
Thomas Firestone is a partner in the Compliance and Investigations Practice Group of the Washington, D.C. office of Baker & McKenzie. His practice focuses on international white collar criminal defense and compliance, with a special focus on Eastern Europe and the former Soviet Union. He previously spent 14 years at the U.S. Department of Justice, first as an Assistant U.S. Attorney in the Eastern District of New York and then as Resident Legal Adviser at the U.S. Embassy in Moscow.
Lina A. Braude is a partner in the Compliance and Investigations Practice Group of the Washington DC office of Baker & McKenzie LLP. She has extensive experience advising clients on the U.S. Foreign Corrupt Practices Act and related legislation, and their application to the activities of multinational companies in emerging markets. She has represented clients in connection with DOJ and SEC multi-jurisdictional investigations related to corruption allegations. She’s originally from Kazakhstan and has been admitted to practice in New York, the District of Columbia, and Kazakhstan.