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.
The FCPA has two main provisions:
- An anti-bribery provision that prohibits corrupt payments to foreign officials to obtain or retain business
- A record-keeping provision that mandates accurate record-keeping and sound systems of internal controls
As a general matter, the record-keeping provision applies only to companies with securities registered with the Securities and Exchange Commission (SEC) and companies that must file reports with the SEC. The anti-bribery provision, however, applies more broadly and encompasses any company with its principal place of business in the U. S.
Importantly, even if a U.S. company does not have any foreign operations, it could be held liable for a FCPA violation committed by a foreign agent, such as a business consultant. Hence, while the FCPA does not prevent the use of consultants or other third parties to solicit business overseas, a domestic company may be liable for illegal payments made by its foreign agents—essentially anyone acting within the scope of its authority for the benefit of the U.S. company. That means companies must vet those agents carefully.
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.
Of course, a company must tailor the due diligence to the particular circumstances. Whatever due diligence it performs, however, must be carefully documented. If the background investigation of a third party raises red flags, the company must document how those questions or concerns were resolved.
Finally, once appropriate due diligence demonstrates that the business party is reputable, the U.S. company should make compliance with anti-bribery laws part of the deal terms. If possible, the domestic company should include language specifically aimed at promoting FCPA compliance in the contract with the foreign third party.
Only through proper preparation on the front end of a transaction will your company be able to assess and avoid risk. In the unfortunate event that a consultant, joint venture partner or other third-party agent violates a bribery law, if the U.S. company that hired the bad actor performed a thorough due diligence process, that will help mitigate any potential penalty. Ideally, appropriate due diligence of foreign business partners will help ensure that no violation occurs in the first place.