Companies that operate in foreign countries often team up with local third-party agents or partners. In many cases, doing business in a foreign country requires international corporations to work with a local partner as a condition of doing business. And even when it’s not required, businesses may find that local partners can help them navigate local markets, regulations and customs.
But for all the benefits, relationships with third parties are fraught with risk, particularly in connection to the Foreign Corrupt Practices Act (FCPA) and other anti-corruption laws. “The risk of dealing with third parties is that you have less control over them than you do your own employees. They may not fully appreciate what it means to comply with U.S. laws. They may not be trained in the same way that your employees are,” said Matthew Jacobs, a government investigations and white collar defense partner at V&E.
The risk of dealing with third parties is that you have less control over them than you do your own employees. They may not fully appreciate what it means to comply with U.S. laws.
Jacobs and Jeff Johnston, also a government investigations and white collar defense partner at V&E, note that the problem of third-party partners engaging in bribery or other illegal activity is a common one and can result in stiff penalties for the corporations that do business with those parties.
“There is a long list of enforcement actions in the United States against U.S. companies and international companies who do business internationally, where bribes were paid through a third party, through a local partner or a consultant,” Johnston said. “And it’s the U.S. government’s position that the company is responsible for payments made through the third party. That illegal conduct by the third party becomes the illegal conduct of the company.”
If your business is expanding into a foreign country with the help of a third party, here are three things you should consider:
1. Ensure you have a meaningful compliance program.
The elevated risk of working with a third party makes your company’s compliance program doubly important. Such a program should include training on compliance with FCPA and other applicable laws — both for your own employees and your third-party partners — as well as onboarding diligence for the third parties. “Whether contractually or otherwise, you want to get that third party to commit to either putting in place their own anti-corruption policy or adopting your anti-corruption policy, which would prohibit any improper conduct,” said Jeff Johnston.
With appropriate systems in place, even if an employee or third party were to engage in bribery or other illegal activity, your company would be on more solid legal footing. “If you don’t have a meaningful compliance program and something bad happens, then in the course of an FCPA prosecution, you’re going to be in bigger trouble,” Jacobs said. “But if you show you have really good controls and procedures, you can insulate the company.”
2. Ask the right questions when performing due diligence on a third party.
Performing due diligence on a potential third-party partner is part of having a meaningful compliance program. When researching the third party, questions you should be asking include how their compensation compares to market-level rates, whether they’re asking to be paid into a local bank account or an offshore one, and whether they come recommended by or are otherwise connected to a government official.
Higher-than-average rates, requests for offshore payments and recommendations by government officials may all present red flags. In the latter case, companies should be aware of the potential for bribes or kickbacks being paid to the government official making the recommendation. “Just the fact that they’re being suggested to you by the government doesn’t mean that they’re not competent to do the job,” explained Johnston. “It just means that you need to be a little more careful at looking at them and making sure they’re qualified to do this — and that they’re committed to not making improper payments. A red flag doesn’t mean stop. A red flag means proceed with caution.”
3. Monitor the third party regularly and be prepared to make hard decisions.
Regular monitoring of your third-party partner’s work is critical to nipping any problems in the bud. The training you provide your employees should enable them to spot suspicious circumstances as they monitor the third party. When necessary, they can trigger internal investigations.
If your company pursues an investigation, “you need to learn exactly what happened and whether anyone within your company knew or should have known of the third-party agent’s suspected illegal activity,” Johnston said. “You need to figure out what your people knew, when they knew it, and what they did in response.” If an investigation shows that illegal activity took place, company leaders have a hard decision to make: whether they should handle the matter internally or report the activity to enforcement authorities. Self-reporting could open the company to enforcement actions and fines, but may also allow the company to receive more lenient penalties. Companies that fail to self-report run the risk of authorities discovering the illegal activity independently, resulting in more serious consequences.
Ultimately, there is no way to guarantee that a foreign-based third party won’t engage in violations of the FCPA and other anti-corruption laws, but the right preparation can give corporations a better chance of preventing such activity and may also help them mitigate potential government penalties when things do go awry. To learn more about what companies should consider when expanding abroad, check out V&E’s “10 Risk Areas for Companies Operating Internationally” guide.