My serious purpose in asking if agents are legal under the FCPA is about compliance with the accounting standards.
The accounting standards require issuers — generally companies with securities registered with the SEC — to keep accurate books and records (the books and records provisions), and to maintain internal accounting controls sufficient to provide reasonable assurance that transactions are accurately recorded, lawful, and in accordance with management’s authorization (the internal controls provisions).
Concerning the FCPA internal controls provisions, my question is: Can issuers meet the requirement if they use intermediaries? Or, is the use of an agent, which necessarily involves some loss of control, always non-compliant with management’s legal duty to provide reasonable assurance that transactions are accurately recorded, lawful, and in accordance with management’s authorization?
The usual justification companies give for hiring agents is that they need the agent’s local knowledge to do business in a new or challenging market. That local knowledge might be about navigating government bidding rules or licensing requirements, complying with a “local content” regime, coordinating logistics, advice about protocols, or even avoiding incorrect use of a local language or dialect.
Despite those typical and apparently reasonable justifications, most FCPA enforcement actions involve intermediaries. Agents, distributors, channel or licensing partners, consultants, and joint venture partners grease local palms, either in knowing collaboration with the company that hired them, or on their own initiative. In every FCPA case where there’s an intermediary, the issuer’s internal controls fall short of what’s required.
How many FCPA enforcement actions involve intermediaries? This year, four of the five corporate enforcement actions have involved intermediaries, including Airbus, Eni S.p.A, Cardinal Health, and Alexion Pharmaceuticals. Last year, nine of the 14 corporate FCPA enforcement actions involved some sort of middleman, including actions against Ericsson, Samsung Heavy Industries, Juniper Networks, Microsoft Corporation, TechnipFMC plc, Walmart Inc., Fresenius, MTS, and Cognizant Technology.
When those companies decided to work with intermediaries, did someone inside make a strong business case for doing so? We know they sometimes didn’t, because the DOJ and SEC said agreements with some of the intermediaries were “shams,” used to funnel bribes to foreign officials or cover up the bribes.
But even if the agreements weren’t shams, even if proponents inside the companies believed sincerely that the agents were necessary, is there a credible justification? Let me ask it another way: Should a company that wants to do business in a new or challenging market ever subcontract to a third party crucial corporate functions, such as marketing and sales, government affairs, and the like? Is doing that consistent with management’s responsibility to be in control of the company?
I’m asking whether a company that believes it must hire third parties to perform crucial corporate functions in its stead should be doing business in that market in the first place? If the answer is “no” as a matter of corporate control, then there’s no legitimate business case for retaining the intermediary. And if that’s true, but the company is retaining agents anyway, then its compliance program is broken.
I’m not convinced this argument against agents and other intermediaries stands up. There may be times and places when agents serve an important purpose. But anyone looking at the FCPA corporate enforcement record can see that intermediaries bring with them alarming compliance risks. So, I think it’s appropriate to ask whether agents can ever have a legitimate business purpose? Or should we say instead that any market where business can be done only through or with an intermediary is automatically off-limits?
Your comments are always welcome.