In our last article, we discussed the importance of making sure that you can legally do business with a potential customer located outside the U.S. In other words, know your customer. When looking to expand your business in foreign markets, it is equally important that companies use the same prudence with third-party consultants, contractors and joint venture partners. In other words, know your business partner. A little bit of due diligence on the front end can help avoid a host of problems down the road.
The driving force compelling this caution is the U.S. Foreign Corrupt Practices Act (FCPA). Even casual observers have noticed the headlines in recent years about multi-million dollar fines against U.S. companies, a testament to the government’s stepped-up enforcement of the FCPA. But fewer business people are aware of the law’s practical implications when reaching out to an overseas business partner.
Recent enforcement actions show the potential consequences of failing to perform proper due diligence. Last year, Maxwell Technologies, Inc., a U.S. energy storage and power delivery company, agreed to disgorge more than $5 million. Chief among the allegations against the company was that it did not perform proper due diligence into a Chinese agent. In another enforcement action last year, Comverse Technologies Inc. (CTI), a U.S. provider of software for communication and billing services, resolved a case involving an indirectly-owned overseas subsidiary and the subsidiary’s third-party agent. The U.S. government alleged that CTI failed to prevent improper payments made by the third-party agent. According to the government’s allegations, there was no due diligence done on the third-party agent, and no independent review of the agent’s contract. CTI paid a $1.2 million penalty.
The lesson is clear: Companies must carefully evaluate overseas business partners. Many companies have a standard checklist in place before engaging any third party. Typical questions include: What is the reputation for corruption in the country where the third party does business? (As one might expect, the rigor of due diligence should not be the same for consultants hired to drum up business in Canada as it is for those hired in China.) What sort of compliance controls does the third party have in place? What is the compliance history of the third party? What is the third party’s relationship with foreign government officials? Does the compensation called for by the contract generally coincide with the market rate for those services? (An inflated amount might signal an extra cushion to pay a bribe.) And so on.