Extending compliance programs to subcontractors has always been tricky. Interfere too much, and your company becomes liable for whatever goes wrong. A hands-off approach won’t work either. When subs flake out, prosecutors blame the head-in-the-sand attitude for the damage.
The balancing act is even trickier these days. Lockdowns, travel restrictions, and supply chain problems bring another layer of complications to monitoring and managing subcontractor compliance. On top of that, many big companies are shorthanded and more dependent than ever on subcontractors.
The dilemma of subcontractor compliance doesn’t have a simple fix. It’s one of those built-in problems that compliance professionals struggle with every day. But there are some common reasons why subs flop at compliance. Being aware of those reasons and spotting them early can help manage the risk.
Here are five reasons why subcontractors may resist compliance:
They lack expertise. Some subcontractors are big, sophisticated companies. But many are small, with few workers devoted to support functions. Even if top bosses learn to talk the compliance language, that doesn’t mean a compliance culture will seep into the ranks. Many smaller companies are surprisingly lean. That’s how they stay competitive and in business. Expecting them to devote precious resources to compliance may be unrealistic. Which brings us to the next reason.
There’s no money for compliance. Subcontractors generally win work by submitting the lowest bids. What’s their final profit margin for a project? It’s surprising how often subs don’t know if they’ll make or lose money. Sometimes they bid work to keep their people and equipment busy. They may hope some jobs will cover costs (or even losses) on other jobs. That’s the contractor mentality. For them, it’s a high-risk, low-reward world. No wonder they’re often reluctant to invest in non-core functions such as compliance.
Subcontractors are bit players. While big projects might have a multi-year horizon, subcontractors are typically involved for less time. With shorter durations and smaller financial stakes, subcontractors may naturally resist investing in new staff or changing their internal workflow. The return on investment and steep learning curve don’t make sense.
The FCPA doesn’t apply to them. Some subcontractors are strictly local. Perhaps they do business in only one country in Africa, say, or Asia. Except for subcontracts, their contact with the outside world may be limited. Are they beyond the reach of the FCPA? Probably. Do they understand how their corrupt actions might cause legal problems for their prime contractor somewhere else? Maybe not. Most project lawyers and compliance professionals have had frustrating discussions with far-flung subcontractors. Convincing them the FCPA threat is real takes patience. Even then, some subcontractors remain skeptical and won’t jump through what they perceive as useless compliance hoops.
The subcontractor intends to cheat. In a very few cases, subcontractors don’t engage with compliance programs because they’re corrupt, so what’s the point? Of course, no subcontractor with any sense will say out loud, “We’re going to pay bribes to get this work done.” Instead, they may say the opposite. “We understand our compliance obligations and will do everything necessary to meet them.” Or, they might cite any or all of the four preceding reasons, as in: “We don’t have the expertise. There’s no money for compliance. We’re just a bit player. And anyway, the FCPA doesn’t apply to us.”
As I said at the top, monitoring and managing subcontractor compliance is one of those built-in problems. And today, with pandemic-driven disruptions leading to more reliance on subcontractors, the problem is bigger than ever. Understanding why some subcontractors can’t or won’t engage with compliance, and being ready to talk about the reasons, is a small step toward managing the risk.