FCPA Compliance and Ethics Blog

February 21, 2012

A Seat at the Table – Compliance in the Contract Tender Process

After all the due diligence on the sales agents and representatives has been completed and they are ready to help you land that large international contract, what is the role of compliance? I would argue that compliance has as central a role to play in any international contract tender process as any other support group in your company; be they legal, tax, HR or another department. If you put compliance at the mix when preparing your response to RFP your company will be much better served than calling them after an issue arises during the contract execution. What are some of the areas that compliance can be of use during contract negotiations?

Subcontractors

It certainly should not surprise anyone to be made aware that your company is legally responsible for its subcontractors in the execution of a contract. This is also true in the anti-corruption context, whether under the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. This means that any direct tier subcontractor, which your company might use to complete an international contract, needs to be thoroughly vetted under your compliance regime as a foreign business partner. The reason for this is the same as an agent, subcontractors are acting on your company’s behalf, and hence your company is responsible for them. If you can perform due diligence on all parties which your company will need to execute the contract in the pre-contract phase, it will make things run more smoothly and efficiently after your company is awarded the contract and moves into the execution phase.

Travel to Company Facilities

As a part of the tender process, your company may be required to bring a foreign governmental official or group of officials to view your US operations. This can occur for a number of legitimate reasons, yet care must be followed under both the FCPA and Bribery Act. Your company can pay bona fide and reasonable expenses that are directly related to either (1) the promotion, demonstration or explanation of products or services; or (2) the execution or performance of a contract. Bona fide promotional expenses may also include trips to manufacturing facilities to observe your company’s production and quality control processes or to conduct inspection and testing called for in a contract of sale.  There can also be to facilities where the training offers a legitimate opportunity to demonstrate products and services. There are some guidelines that need to be followed and they are as follows:

• Any reimbursement for air fare will be for economy class.

• Do not select the particular officials who will travel. That decision will be made solely by the foreign government.

• Only host the designated officials and not their spouses or family members.

• Pay all costs directly to the service providers; in the event that an expense requires reimbursement, you may do so, up to a modest daily minimum (e.g., $35), upon presentation of a written receipt.

• Any souvenirs you provide the visiting officials should reflect the business and/or logo and would be of nominal value, e.g., shirts or tote bags.

• Apart from the expenses identified above, do not compensate the foreign government or the officials for their visit, do not fund, organize, or host any other entertainment, side trips, or leisure activities for the officials, or provide the officials with any stipend or spending money.

• The training costs and expenses will be only those necessary and reasonable to educate the visiting officials about the operation of your company.

One of the keys is having any such travel approved by your Compliance Department prior to the travel actually occurring. In addition to the above guidelines there should be a written agenda, reviewed and approved by the compliance representative before the travel occurs. Lastly, all costs associated with the travel and entertainment must be recorded in the Company’s books and records as cost of sales and not an operating expense. The written agenda approved by the compliance representative needs to be maintained and verified by after-action reports so that the entire process is documented.

Testing and Evaluation

If your company manufactures a product, your international customer may well ask to test and evaluate products as a part of the contract tender process. These products may only be provided to support such opportunities. The testing and evaluation of samples should only occur if required by a public tender. Exceptions may be made if the samples are formally requested in writing by the potential government customer in connection with a legitimate contract opportunity. Care should be made so that any product samples are delivered to the foreign governmental agency issuing the tender, not to an individual employee or official, or to a third party. There should be a formal written request identifying the specific number of samples to be tested and evaluated from the potential government customer. The number of samples requested should be reasonable in light of the overall potential contract. All costs associated with the provisioning of sample products for testing and evaluation must be recorded in the Company’s books and records as cost of sales and not an operating expense.

Evaluation of Compliance Risk

Just as other types of risk should be evaluated in any internal contract review process, the compliance risks should also be evaluated. What is the Transparency International – Corruption Perceptions Index ranking of the country or government where the contract will be executed? Are there other sources which can be accessed, such as World Check’s Country Check rating, the Mintz Group’s heat map “Where the Bribes Are”, or the FCPA Database, which aggregates several different types of information but specifically the national anti-corruption and anti-bribery laws applicable to local jurisdictions across the globe. Using these sources and perhaps others, you can put together not only a risk evaluation plan but also a risk mitigation plan for management which they can take into account when the decision of Bid/No Bid or pricing is finalized.

The Compliance Department is more than simply the group which performs the due diligence, trains on compliance and responds to inquiries. It can, and should, play an active role in landing contracts. A mature compliance program can be a great benefit for a company, not only in evaluating risk from the compliance perspective but also preparing the necessary steps so that if a contact is awarded, it can be executed in a time efficient manner. But it must have a seat at the table.

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.

© Thomas R. Fox, 2012

May 2, 2011

Country Risk Rating: A More Sophisticated Approach

One of the areas of risk which is traditionally assessed is that of geography or country risk. The UK Bribery Act Guidance defines country risk as:

Country risk: this is evidenced by perceived high levels of corruption, an absence of effectively implemented anti-bribery legislation and a failure of the foreign government, media, local business community and civil society effectively to promote transparent procurement and investment policies.

This definition would seem to call for more than an analysis of whether countries are perceived as “the usual suspects” when it comes to risk. Most compliance practitioners to date have used the Transparency International Corruptions Perceptions Index to assess country risk. The Corruptions Perceptions Index, as defined by Transparency International,  “ranks more than 150 countries in terms of perceived levels of corruption, as determined by expert assessments and opinion surveys.” However, the guidance for best practices, as set forth in the most recent Bribery Act Guidance the concept of ‘compliance convergence’ and the recent Deferred Prosecution Agreements (DPAs) entered into by the US Department of Justice (DOJ), would seem to indicate that a more robust risk assessment should be utilized regarding the corruption and compliance risks of individual controls.

I recently had the opportunity to review another tool with which companies can assess an overall geographic or country risk. It is a product called “Country-Check” and it was developed by World-Check (Full Disclosure: World-Check is the sponsor of the World-Check FCPA Speaking Tour, of which I am a participant.) The Country-Check tool is a customizable risk index that ranks the overall risk levels in 244 jurisdictions across the globe.

Country-Check measures risk using over 140 input sources. From these input sources, a company can access up to 42 dimensions of risks from a wide spectrum of different types of threats which may need assessment. These types of risks include: (1) political – varying from governance types to civil liberties, regulatory control, control of corruption and human rights issues; (2) financial – from GDP, overall country debt, military expenditure, average per capita savings and economic freedom; (3) criminality – factors ranging from money-laundering and fraud to terrorism, corruption, export control and the overall country crime rate.

In addition to the above, the Country-Check model can be custom developed which allows a company to make individual adjustments for not only the inputs it perceives as important for its own business but also allows an industry weighted assessment. This factor would come into play with the risk assessments discussed in the initial three DPAs, released in 2011. These DPAs were with Alcatel-Lucent, Maxwell Technologies and Tyson Foods respectively. In each of these DPAs, the DOJ mandated that the companies assess the geographic risks which each of these companies face in the areas where they conduct business. However, these mandated risk assessments went beyond simply geography to such areas as government touch points in conducting business. The Country-Check model would allow a company to customize the product so that a report is generated which measures this type of risk.

In the concept of compliance convergence risks posed beyond simply those relating to the violations of the US Foreign Corrupt Practices Act (FCPA) or UK Bribery Act should also be assessed. This means that a company should also review such areas as propensity of a country to engage in or have lax enforcement of anti-money laundering laws and regulations and have issues related to vigorous enforcement of export controls. The Country-Check tool provides standardized risk intelligence for all of these areas. The beauty of such a tool is that not only does a company garner a more sophisticated picture of the overall risk it may be facing and perform enhanced due diligence as required, such an analysis allows a company to manage these risks more effective by deploying stronger management assets as called for through such a risk analysis.

As companies and regulators grow more sophisticated in the areas of anti-bribery and anti-corruption, best practices keep evolving. The risk assessment that a company does should inform its overall compliance program. The Country-Check tool is a very powerful instrument by which companies can perform a sophisticated risk analysis of a country which they are assessing. I suggest that you head over to the Country-Check website and take a look at the offering.

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If you are in Phoenix or San Diego, the World Check FCPA Tour will be in your city this week. Please come out and here about the most current FCPA best practices.

Tuesday, May 3 from 8-10 AM PDT at McCormick & Schmick’s Seafood Restaurant, in Phoenix, AZ. For information and registration details click here.

Wednesday, May 4 from 8-10 AM PDT at San Diego Marriott Del Mar: Santa Fe Ballroom, in San Diego, CA. For information and registration details click here.

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My colleague Howard Sklar had an interesting idea. It was that he and I do a video chat each week on the past week’s stories from the world of compliance. We have begun this journey and the results are “This Week in FCPA“; which can be found here.

Every week, Howard and I will get together and talk about the week’s events in FCPA. This week, we talk about the UK Bribery Act, and how companies should react; we discuss the Johnson & Johnson deferred prosecution agreement and J&J’s added undertakings; and we discuss the recent challenges to the idea that state-owned entities can be foreign officials. We also talk about what contract provisions should be in every contract, and whether audit rights are a good thing or not.


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.

© Thomas R. Fox, 2011

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