As I spent some time this morning trolling through a few dozen articles and opinion pieces about the Unaoil scandal, I was drawn to a Huffington post article detailing the roles of two large commercial banks.
It was not the involvement, in and of itself, of these banks that drew my interest but the discussion about how Unaoil’s bank accounts could be shielded from outside disclosure pursuant to third party audit rights.
The article notes:
Unaoil deliberately structured bank accounts to obscure its dealings from other companies and legal authorities. In September 2008, for instance, the firm was negotiating a contract with Weatherford, a U.S. chemical company that was paying Unaoil to help it get business with the Iraqi government. Unaoil finance manager Sandy Young sent an email to the firm’s leadership explaining why the firm wanted to shield as many bank accounts as possible from Weatherford, which was required to perform due diligence on Unaoil under the Foreign Corrupt Practices Act. Unaoil eventually secured a lucrative deal with the Iraqi government on behalf of Weatherford that involved paying kickbacks to senior Iraqi officials.
Restricting the audit rights to the bank account where [Weatherford] monies have been transferred into is certainly preferred with advance warning and inspection during normal working hours,” Young wrote. “As it stands today we use such several sub-accounts only to collect money from principals (we do not make payments from these sub-accounts other than to transfer funds out to our main account from which all payments are made). So with such restrictions all Wfd. would be able to see will be their payments coming in and subsequent transfers of funds out of this account to our main account.
It is unclear what Weatherford ultimately agreed to in terms of audit right language and whether it may have actually executed those audit rights at all. This would be interesting to know.
What is clear however is that audit right language is often nebulous and does not always adequately encapsulate the basic notion that the auditing party needs to be in the position to review any and all transactions that may be relevant to its business dealings.
In the case of Unaoil, the company was trying to suppress access to the most important and high-risk component of the relationship: money leaving the auditee party “on behalf” of the auditing party.
Limiting Weatherford’s access to the account receiving funds and blocking its access to accounts from which money flowed to third parties essentially had the effect of rendering the audit rights useless, at least in terms of a transactional accounting review.
In drafting effective audit rights, companies should strive for broad language that does not unnecessarily restrict its access to relevant information. As important, companies need to be smart (and firm) when executing those audit rights, and agreeing with the target company on the scope of the review and the access to data.
Companies should consider making use of forensic accounting experts with real world experience at ferreting out the ways companies move money around internally and how they conceal transactions in their books and records. Obtaining this level of audit access and cooperation out of third parties might not always be easy but failure to obtain should be recognized as a potentially significant red flag.
Jean-Michel Ferat,CPA, CFF is a Managing Director in the Washington D.C office of the Claro Group and has over eighteen years of experience in the specialized fields of forensic accounting and fraud detection. He has applied his skills in a variety of cases involving financial statement fraud, high-level corruption, terrorist financing, collusive bidding rings, money laundering, embezzlement, asset misappropriation. He has undertaken dozens of corruption investigations around the globe including a lead role in the United Nations Oil-for-Food Program investigation.
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