I see it time and time again — third parties that would otherwise pass muster under a client’s due diligence process create their own red flags.
They push back on a local registration requirement. They ask that payments be rendered from an offshore account. They fail to disclose adverse media that actually has a reasonable explanation. The diligence process then grinds to a halt as the client scrutinizes the issue.
In the worst case scenario, the relationship is not just put on hold, but does not proceed; the third party’s conduct raises so many concerns that the relationship is considered too risky.
To be clear at the outset, this is not intended to cast aspersions on third party intermediaries. In my experience, the vast majority of intermediaries work very hard for their clients, and they perform necessary services in an ethical manner.
Rather, this post is for all of the intermediaries out there for the purpose of helping them — and the companies they represent — to avoid creating issues where none would otherwise exist.
With that, here’s a list of red flags that I see crop up that could easily have been avoided.
1. Pushback on local law issues. A significant number of countries impose some form of regulation on the use of third party intermediaries. Canada, for example, requires intermediaries to register as lobbyists. Certain former officials in Brazil are subject to four months garden leave.
Any due diligence process worth its salt includes an analysis of local laws governing the engagement of intermediaries. Many companies engage directly with local counsel in each country where they hire a third party. Others make use of local law resources offered by organizations such as TRACE International. Intermediaries should therefore assume that their clients are just as conversant with local laws as they are — indeed, sometimes more so.
Nothing is gained by pushing back on local law issues. If a client asks that you fulfil certain registration requirements, or comply with revolving door issues, don’t push back. In all likelihood, they’ve done their homework. This is not to say that you can’t have a healthy discussion about a local law issue, but insisting that your client’s local counsel has gotten it all wrong will only raise concerns that you’re not interested in the legal niceties that govern your services.
2. Problematic payment arrangements. We all hate taxes. However, I recommend that intermediaries avoid requesting payments in tax havens. All too often, off-shore jurisdictions have been used not just as part of legitimate tax minimization strategies, but as a conduits for bribery and money laundering.
I have a client whose distributor in Kazakhstan asked last week if it could start rendering payments from an account in Estonia, held in the name of an affiliate. The request came in just days after news of the Danske Bank scandal made international headlines. This, of course, put a long-standing distributor relationship in jeopardy.
3. Failure to report adverse media. A media search is one of the most basic elements of an anti-corruption compliance program. In this age of electronic media, intermediaries should assume that if they’re the subject of adverse media of any kind, their clients will learn about it, and ask about it. Many companies ask their prospective intermediaries if they’ve been mentioned negatively in the press. Failing to disclose adverse media not only implies that you’ve got something to hide, but it suggests you’re willing to fib in due diligence materials to make yourself look good.
I generally advise intermediaries to get ahead of negative press. Disclose it to your clients before they ask about it. Tell them your version of the story, and be prepared to back it up. You’ll likely win points and trust by being forthright.
4. No code of conduct. This one is a no-brainer. Every organization, large and small, should have a code of conduct. It doesn’t have to be lengthy or complex. You don’t need a lawyer to draft one. The Internet abounds with sample codes of conduct. Find one you like, and spend some time adapting it to your organization.
Virtually every company we represent asks their prospective and existing intermediaries if they maintain a written code of conduct. I am consistently surprised by the number of intermediaries who haven’t adopted one. I find this particularly concerning, given the minimal effort involved in adopting one, and the risks that intermediary activities pose to companies and their third parties.
It’s well known that 90 percent of all FCPA enforcement actions involve intermediaries. I tell intermediaries that having a code of conduct is a competitive advantage. It demonstrates an awareness of the risks of dealing with government officials, and also documents to your clients that you appreciate — and seek to minimize –those risks.
Ultimately, if you’re in the business of representing multinational companies, it behooves you to not only become familiar with the provisions of the FCPA and to sign certifications when asked, but to understand the intricacies of due diligence and the compliance issues of importance to your clientele.
Stumbling into well-known red flags can jeopardize valued relationships, and divert time from marketing to answering questions from lawyers. By contrast, knowing common FCPA red flags and avoiding them will streamline the due diligence process, earn trust, and enhance your relationship with your clients.
Bill Steinman, pictured above, is a Contributing Editor of the FCPA Blog. He’s the senior partner at Steinman & Rodgers LLP, a boutique law firm in Washington, D.C. specializing in international anti-corruption compliance and investigations.