On this day we celebrate the 1607 founding of the English colony at Jamestown. While credited with being the first English colony in what became America, it’s probably more accurate to refer to it as the first permanent English colony that survived for any length of time. The largely male colonists faced many tough years before they finally pulled through. One thing that made the colonists experience so difficult was that they had no idea about what to expect when they sailed over to the New World.
Hopefully in the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act compliance regime, the situation is a bit more advanced today when it comes to looking at third parties, in the pre-contract phase of third party management, during due diligence. While most companies, if not comfortable with the need for and execution of pre-contract signing due diligence, certainly understand the need for this process; the same is not universally true for the non-US or non-UK company upon which due diligence is being performed upon. An interesting article in the recent issue of Compliance Insider, entitled “Disclosing the Subject-Dealing with Compliance Immaturity”, deals with precisely this situation; where the third party has not gone through the due diligence process. The article provides some useful tips on how the compliance practitioner can get through this sometimes-delicate process.
One thing the article makes clear is that if you are performing due diligence on a third party, you should fully disclose this information to the third party. They state, “There is nothing to be gained by not telling the subject company about the process or trying to keep it secret. Except for in an acquisition where the buyer has yet to disclose themselves, there is little advantage in keeping quiet. The third party expects that you will be doing some form of due diligence and engaging a compliance or legal firm to complete a review. There is nothing that the due diligence company or law firm is going to do differently than if that due diligence were secret – no one would ever disclose more than they had to and would never disclose the name of the client for which they were acting.”
After you disclose to the third party that they need to go through your company’s due diligence process, which should begin with a questionnaire to help determine the appropriate level of due diligence to perform, you may face pushback from the third party. Unfortunately, as the article notes, such pushback usually goes initially to the business contact, which tends to side with the third party against the compliance function. This means that you need to educate your business unit sponsor on the reasons your company must engage in the third party management process so that they can communicate this to the third party. The article identifies three major reasons which a third party may resist your attempts at due diligence.
- Immaturity - the third party is “not used to due diligence or working with global companies that focus on compliance. They are not aware of the value of due diligence and have been living in the “compliance cave”. This is an issue in itself as it shows a degree of compliance immaturity and certainly gives an insight into how that company might be as an acquired entity. They are probably going to focus on the fact that there is an inbuilt level of trust that is needed in business and that the company should rely on that trust.”
- Negotiating - the third party may be “negotiating, trying to leverage the issue for their own gain as part of a negotiation. They may not be trying to hide anything per se, but may be sending a message that the company is taking too long, being too conservative, being caught in compliance obfuscation or losing sight of the real deal.”
- Hiding - it may also be that the third party does have something to hide.
The article suggests four clear steps that you can take if you are faced with one or a multiple of the above reasons for pushback from the third party.
- Engage the issue head on – it is important that you quickly and succinctly address concerns that your compliance team or compliance process is “heavy handed or that there is a lack of trust” between your company and the third party.
- Engage the business sponsor – as I stated above, one of the key components of any successful third party lifecycle management program is the engagement of the business sponsor. Obviously the business sponsor needs to justify the potential contractual relationship your company would have with the third party but the business sponsor is also the primary point of contact with the third party, throughout both the pre-contracting phase and the post-contracting relationship management. The article intones that if the third party tries to use an excuse to stop or lessen the process, “then the transaction is probably not worth it.”
- Develop your company’s compliance message – you should be crystal clear that your company will “conduct due diligence and background screening on all its proposed business partners and it is company policy to do so.” This can be done so through reference to the FPCA and your company policy. But more than simply a legal explanation, reputational risk is also important for your company. Be clear and re-emphasize your message that “there is neither a lack of trust nor an assumption of lack of integrity on the part of the subject company – it is normal procedure and gets done for all third parties of certain types right across the company, and this subject company is no different.”
- Negotiate a proposed go-forward plan – the article emphasizes that you should “not back down” and I whole-heartedly agree. But more than simply standing strong, you can use these discussions to help educate the third party involved why it is not only important for your company but also the third party. If they want to do business with any US or UK Company, they will need to go through this process. Indeed, it will make them more marketable to US or UK Companies if they have gone through the process.
Like many compliance practitioners, I came to the field of compliance through the legal department. Working for a very big fish company in the energy company it was very much ‘big fish-little fish’ where the big fish told the little fish what would be in the contract. However that model does not, nor should it, work in the compliance field. I have found that most third parties understand that if they desire to do business with a US or UK company, since we are required to perform due diligence as part of any best practices compliance program, the third party will need to be a part of that process. The Compliance Insider article provides a valuable look at a topic which is not always focused on from the perspective of the US or UK based compliance practitioner.
This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at firstname.lastname@example.org.
© Thomas R. Fox, 2014