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Bill Steinman
Contributing Editor

Intermediaries: Separating red flags from red herrings

In this era of heightened FCPA enforcement, it is easy to assume that a red flag signals the end of a relationship with a business intermediary. By my count, 11 of the last 17 FCPA enforcement actions involved bribes funneled to foreign officials through third parties.

Moreover, recent enforcement actions like those involving FMC Technip, Quad/Graphics, Microsoft and Juniper Networks highlight the lengths to which companies must go to scrutinize and monitor their business partners.

But a red flag does not always have to signal a death knell for the third party relationship. Rather, red flags often mean that it’s time to roll up your sleeves and dig into the facts to determine whether the warning actually suggests you should expect misconduct.  Sometimes it is simply a tempest in a teapot.

Take a situation I recently encountered in a compliance review for one of my clients. The client has a new general counsel who is reviewing the company’s projects in high risk jurisdictions, including a relatively recent contract the company secured in Kenya after pursuing it for well over a year. For most of the pursuit, the company worked with a local sales agent — let’s call them Agent A.

Toward the end of the tender process, the client decided to end its relationship with Agent A and engage a new sales representative — Agent B. Within a month or two of retaining Agent B, the client won the contract. How was Agent B able to deliver the project after such a short time on the job? Classic third party red flag.

Upon closer examination, however, the red flag was more of a red herring. Engaging Agent B was part of a broader effort across the company’s several business segments to retain a single intermediary for all pursuits in Kenya. Up to that point, each business segment had signed up its own sales agents; indeed, some business units engaged different agents for different programs.

The company had a gaggle of agents in the country, all operating in their own swim lanes, without any overall coordination. Though all of the agents had been subjected to thorough due diligence reviews and careful monitoring, government customers had expressed frustration — they were unsure who spoke for the company and who they should turn to when they had questions about the company’s projects in Kenya.

Moreover, the company had gone through a robust search process before settling on Agent B. The company’s regional vice president had spoken with several of her contacts at other multinationals operating in Kenya for recommendations. She did not seek recommendations from Kenyan government officials. She interviewed several potential candidates, and ultimately proposed the engagement of Agent B.

The company conducted a robust due diligence review, which confirmed Agent B’s long-standing experience in the company’s industry and revealed no reputational issues. Although Agent B agreed to support the company’s pursuit of the contract in question, the parties agreed that Agent B would not receive a commission on the project, given the limited amount of time remaining before the expected award date.

Had the company taken a reflexive approach to the red flag, it might have ended its relationship with Agent B.  However, digging into the facts demonstrated that doing so was unnecessary.

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In an upcoming webinar, I’ll address similar situations I’ve encountered while advising multinational companies about third party risk.

I’ll describe common third party red flags and how to determine whether they’re benign or problematic.  Expending the effort to evaluate red flags is one of the hallmarks of an effective compliance program, but that doesn’t mean compliance professionals have to be the “Department of No.”

Seeking solutions to address common red flags can help compliance professionals avoid eroding the trust of their business colleagues, which can lead to businesspeople disengaging from the compliance function.

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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.

Register for the free upcoming webinar “Common Third Party Red Flags and How to Address Them” here

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