The Red Scare: Knowledge and the Importance of Due Diligence

 Ed. Note-we continue our series of guest posts from our colleague Mary Shaddock Jones, who today looks at the importance of due diligence.

At midnight on November 9, 1989, East Germany’s rulers gave permission for the Berlin Wall, separating East and West Berlin, to be opened up.  Ecstatic crowds immediately began to clamber on top of the Wall and hack large chunks out of the 28-mile barrier.  I remember viewing the scene on T.V.  It was a momentous moment in world history.  For those of you who may not know, while East Germany never officially adopted a “red flag” for its country, on most official buildings, the national flag (black-red-gold with hammer and circle) was flown with a solid red flag flown next to it!  Twenty-two years later the “fall of the Red Flag of East Berlin”, seems like distant memory.  However, for businesses doing business internationally the “red flag” has once again come to represent a warning or a threat in terms of liability under the FCPA

The Lay Person’s guide to the FCPA published by the Department of Justice warns U.S. firms about their choice of overseas partners and agents. A bad choice is someone who is likely to make corrupt payments. That likelihood, the DOJ says, is usually indicated by warning signs called “red flags.” If there are red flags to start with, and if the intermediary does bribe a foreign official to help the business, the company will have trouble arguing it shouldn’t be responsible for an FCPA violation based on an indirect corrupt payment.

Red flags, as the name suggests are easy to spot, and include such things as: (1) unusual payment patterns or financial arrangements;  (2) a history of corruption in the country;  (3) a refusal by the foreign joint venture partner or representative to certify that it will not take any action that would cause the U.S. firm to be in violation of the FCPA; (4) unusually high commissions; (5) Lack of transparency in expenses and accounting records; (6) An apparent lack of qualifications or resources on the part of the joint venture partner or  representative to perform the services offered; and, (7) a recommendation from the local government of the intermediary to hire this particular third party.

Although red flags are often relatively easy to discover, the failure to look may result in a company being subject to severe penalties.  As a result,  prior to dealing with any third party, companies should conduct Due Diligence in an  attempt to discover whether the third party is involved in any prohibited corrupt practices or has some connection to a foreign government official that you may not be aware of.  Due diligence is thus an essential tool, as it allows one to acquire knowledge of any existing or potential “red flags”, thus enabling entities to make informed decisions on whether or not to interact with or transact business with certain persons and entities.

The practical pointer for today’s blog is this- The undeniable truth is that Companies must know who they are doing business with and, as importantly, why they are choosing to do business with this particular entity.  This requires the accumulation of information! In order to collect adequate information concerning prospective third-party Agents or Business Partners, many companies are now using a consistent set of tools, for example: (1) questionnaires requiring the person within the company who is recommending the retention of a third party to provide basic information such as the reasons for engagement, the specific services required, how prospective third-party individuals or companies were selected for possible service, relevant experience and capabilities of the prospective third party, whether the prospective third-party would need to interact with government officials, how much and in what manner the third party should be compensated, etc.; (2) a questionnaire submitted to the prospective third party requesting significant information regarding the ownership, physical location, management, experience, relationship to foreign government officials, references of the third party and an assurance by the third party that it understands and is willing to comply with anti-corruption laws and regulations; (3) some method of vetting the reputation and background of the prospective third-party representative or business partner. Ultimately,  the level of due diligence required will generally be commensurate with the level of perceived risk.

When conducting due diligence of high-risk third parties, one should typically employ the services of  third party professionals.  These professionals can help insure that the high risk third party does not pose potential FCPA liability through the use of various means such as: checks of corporate filings and business records, legal proceedings, Internet searches, and adverse media checks.  Furthermore,  many emerging markets and developing countries pose such a great risk of FCPA liability, that additional due diligence procedures including “in-country” (a/k/a “boots on the ground”) searches may be required such as: conducting searches of localized public records, phone interviews, site visits, and reference checks.

Consider the following policy language:

Under the U.S. FCPA,  the Company and its Personnel could be liable for indirect offers, promises of payments, or payments to any Government Official (or to private entity if the UK Bribery Act is involved) if such offers, promises, or payments are made through an Agent or Partner with the knowledge that a Government Official will be the ultimate recipient. As a result, it is important that the Company, through the Company Compliance Officer, consider the necessity of conducting anti-corruption due diligence on a prospective Agent or Partner. If after performing a risk assessment the Company concludes that a due diligence investigation should be conducted, then the extent of the investigation must be determined.  The degree of due diligence the Company will perform depends upon a lot of factors, including the dollar value of the arrangement, the expected contact with government officials, and the country at risk.  In making the determination, the Company will consider whether the transaction raises “red flags”.

Examples of common “red flags” with third parties are as follows:

• The prospective acquisition target, Agent, or Partner insists that its identity remain confidential or refuses to divulge the identity of its owners, directors, or officers.
• Family, business or other ‘special’ ties with government or political officials.
• Reputation for violation of local law or company policy, such as prohibitions on commissions, or currency or tax law violations. Also negative press, rumors, allegations, investigations or sanctions.
• The transaction or the prospective acquisition target, Agent, or Partner is or operates in a country where there is widespread corruption or a history of bribes and kickbacks
• Requests from government officials or agencies to engage or hire specific third parties.
• Inadequate credentials for the nature of the engagement or lack of an office or an established place of business.
• Missing or inadequate documentation to support services and invoices. Unsupported charges or expenses, requests for payment of non-contracted amounts.
• Convoluted or complex payment requests, such as payment to a third party or to accounts in other countries, requests for payments in cash or requests for upfront payment for expenses or other fees.
• Requests for political, charitable contributions or other favors as a way of influencing official action.
• Third party has a reputation for getting ‘things done’ regardless of circumstances or suggests that for a certain amount of money, he can fix the problem or “make it go away”.

All due diligence investigations conducted by the Company will include an analysis of potential “red flag” issues.  Investigations of potential “red flag” issues should be carefully documented and relevant documents, such as due diligence, questionnaires, reports, and compliance certificates, should be maintained by the Company Compliance Officer or his or her designee.

On Monday, we will examine contractual language to consider when contracting with approved Agents and Partners.  Stay tuned.

 Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries.  She was of the first individuals in the United States to earn TRACE Anti-bribery Specialist Accreditation (TASA).  She can be reached at msjones@msjllc.com or 337-513-0335. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

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 Ashes and Australian Anti-Bribery Enforcement Efforts, with an assist from ethiXbase

Today we celebrate my favorite English sport, cricket. As baseball is my first love, it is not too surprising to find that I enjoy cricket. I like the cerebral nature of the game, coupled with its meandering pace, which can lead to Test Matches of five days. We note that England currently holds the Ashes, which is a Test series that has been played between England and Australia since 1882. It is one of the most celebrated rivalries in international cricket and is currently played biennially, alternately in England and Australia. England is the current holder after winning the Ashes in 2009 and again in the 2010/11 series in Australia. The next series will be held in 2013 in England.

Transitioning from the Ashes, we expand our UK theme week to include the Commonwealth of Nations country of Australia, which has an anti-bribery law on the books, entitled “The Criminal Code Amendment (Bribery of Foreign Public Officials) Act 1999”, which was viewed by the Australian Federal Government as a major step in formalizing Australia’s commitment to stamping out international corruption. A Transparency International (TI) White Paper, entitled “Australian Laws Prohibiting Foreign Bribery”, said that the Australian legislation was a part of an international effort to ensure that contracts are won and awarded fairly, which was led by signatories to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

As reported by TI, in an article entitled “Steps taken to implement and enforce the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions”, this law was amended in 2010, when “the Australian Parliament passed the Crimes Legislation Amendment (Serious and Organised Crime) Act 2010.” This new law increased the financial penalties for bribery offences by creating a formula for fines and penalties based on existing penalties for restrictive trade practices and cartel behavior but it allowed a higher monetary fine if the serious criminal nature of bribery and the serious detrimental effects of bribery merited it.

From the looks of recent developments Down Under, it appears that the anti-bribery enforcement is alive and well. There have been several recent articles involving different industries in Australia, which have allegedly self-reported violations of the Australian Laws Prohibiting Foreign Bribery or are otherwise under investigation. In an article in The Age, entitled “Firms tell of possible bribes”, Richard Baker and Nick McKenzie reported that “companies involved in mining, exploration and other sectors in Africa and Asia have discovered possible evidence of overseas bribery during recent internal audits.” One company Leighton Holdings has publicly admitted “it had alerted the AFP to a possible breach of anti-bribery laws. The alleged breach involves its Singapore-based subsidiary Leighton Offshore Pvt and payments made to facilitate a wharf construction project in Iraq.” Further, The Age reported “Documents from a NSW Supreme Court case last year reveal Leighton conducted an internal inquiry into ”apparently corrupt conduct” involving allegations that a senior employee channelled half a million dollars worth of steel to a third-party project at the Bantam Shipyard in Indonesia.”

In another article by the same two reporters, this time in the Sydney Morning Herald, entitled “Defence firm faces bribery probe”, Baker and McKenzie reported “AUSTRALIA’s biggest military contractor, Tenix Defence, is under federal police investigation for allegedly bribing officials and politicians across Asia to win massive contracts.” The article reported that the Australian Federal Police (AFP) has stated the agency ”received a referral in 2009 for alleged improper payments made by multinational staff members to secure contracts in the Asia region”. The investigation involves five separate Tenix transactions in which the company “is suspected of channelling several million dollars in alleged kickbacks through agents to win defence contracts across Asian countries including Indonesia and the Philippines between 2001 and 2008.”

With this increase in Australian enforcement, you may wonder, if you are sitting in the UK or US, just how can you keep up with the plethora of new laws, codes and enforcement actions. One of the best answers appeared this week in the FCPA Blog with the announcement of the “rollout of ethiXbase, the world’s largest anti-corruption database. ethiXbase builds on the global success of the FCPA Database. It features 8,000 BRIIC and U.S. anti-corruption enforcement actions, live SEC and DOJ feeds, and the most extensive collection of local anti-corruption and gift-giving laws ever assembled.” In addition to providing the legal basis for anti-corruption and anti-bribery enforcement, the database has trending analytics tools that reveal emerging compliance trouble spots around the world. Additionally, users of the database can create alerts for countries, industries, and companies. Finally, close to my heart as a practicing lawyer, the database has a global law firm directory available to the public, which includes 9,000 listings. It also includes more than 1,200 searchable law firm memos by leading practitioners who cover the US Foreign Corrupt Practices Act (FCPA), UK Bribery Act, and other global enforcements.

So while thinking of England and the UK Bribery Act, it is well to remember that most of the world is moving towards a more robust enforcement regime to combat corruption and bribery. While the US has led the way, other countries are quickly catching up and the era of international enforcement cooperation is upon all compliance practitioners and companies. It is far better to learn what laws you may face, assess your risks and then manage or mitigate those risks now rather than later.

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The articles referenced in this post were provided by James Greenall, a Director with STEELE in Washington DC,  who has been closely following anti-corruption efforts in his native Australia, where his firm conducts a significant amount of investigative due diligence. James can be reached atjgreenall@steelecis.com.

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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 tfox@tfoxlaw.com.