FCPA Compliance and Ethics Blog

March 9, 2010

Maintaining a Relationship with a Foreign Business Partner under the FCPA after the Contract is Signed – Monitor, Monitor, and then, Monitor

In previous blogs postings, we have shared our thoughts on other aspect of the Foreign Business Partner (foreign agents, reseller, distributors or any person/entity representing the company overseas) relationship including how to evaluate the Foreign Corrupt Practices Act (FCPA) compliance risk; how to perform due diligence on prospective Foreign Business Partners; how to internally evaluate the information obtained through such due diligence; and what compliance contract terms and conditions you should set for the Foreign Business Partners. In this posting, we will discuss the steps a US company must follow to implement a procedure to monitor the actions of a Foreign Business Partner going forward.

DPA Guidance

In its Deferred Prosecution Agreement (DPA) with the Monsanto Company for their FCPA violations, the Department of Justice (DOJ) provided some guidance on the continuing obligation to monitor Foreign Business Partners. In the Monsanto DPA, the DOJ agreed, after the initial due diligence and appropriate review were completed on Foreign Business Partners, for Monsanto to implement certain post contract procedures. These requirements to Monsanto can be used as guidelines as to what the DOJ will look for from other US companies who have entered into relationships with Foreign Business Partners; especially in the area of monitoring the foreign business partner.

A US company should, on a periodic basis of not less than every three years, conduct rigorous compliance audits of its operations with the foreign business partners. This monitoring would include, but not be limited to, detailed audits of the foreign business partner unit’s books and records, with specific attention to payments and commissions to agents, consultants, contractors, and subcontractors with responsibilities that include interactions with foreign officials and contributions to joint ventures. The compliance audit should include interviews with employees, consultants, agents, contractors, subcontractors and joint venture partners. Lastly, a review of the FCPA compliance training provided to the foreign business partner should be included.

Ongoing Oversight

In addition to the DOJ guidance provided in the Monsanto DPA, it is recommended that there be substantial involvement not only by the business unit most closely involved with the Foreign Business Partner, but also by Legal; Compliance and other departments which would assist in completing the functions as outlined by the Monsanto DPA. The most significant reason for maintaining a post-contract relationship is to ensure the business units remain engaged in the Foreign Business Partner process. This involvement can also include some of the following participation, the senior business Vice President for the region where the Foreign Business Partner operates should annually call upon the Foreign Business Partner, in-person, to review all of the prospective business proposals and concluded business transactions that the Foreign Business Partner has engaged in. This annual VP review must not take the place of a legal or compliance review but should focus on the relationship from the business perspective.

Managing the risk of a relationship with a foreign business partner is one of the most critical aspects of a FCPA compliance program. The documented risk for the potential violation of the FCPA by a foreign business partner to a US company is quite high. To engage a foreign business partner, in a manner that properly assesses and manages the risk to, and for, a US company, requires a committee of time, money and substantial effort. However, with a compliance based risk management procedure in place, the risk can be properly managed and a foreign business relationship can be successful for all parties.

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, 2010

March 4, 2010

Internal Review of a Proposed Foreign Business Partner

In prior blogs, we explored how to rank Foreign Business Partners so that you can begin an appropriate due diligence process. We also explored what you might wish to investigate during the due diligence process. A Foreign Business Partner Review Committee should be established which is tasked with reviewing all the investigative due diligence and the Business Unit’s case for partnering with the person or entity. The next area of review should of the proposed Foreign Business Partner’s ethics and compliance program. Such a program should have, at a minimum, the following elements of a Foreign Corrupt Practices Act (FCPA)-style compliance program in place.

• Your Foreign Business Partner should…
o have a restriction on facilitation payments, gifts, entertainment and travel;
o require proper accounting and invoicing;
o have policies that flow down to any sub-vendors under the Foreign Business Partner

If the Foreign Business Partner’s program does not meet your Company’s, or the FCPA, standards you should require the implementation of a program that will meet those suggested in the US Sentencing Guidelines so that it will meet Department of Justice (DOJ) approval.

The next area of review by the Foreign Business Partner Review Committee is the proposed contract with the Foreign Business Partner. The contract must have compliance obligations stated in the formation documents, whether it is a simple agency or consulting agreement or a joint venture with several formation documents. All formation agreements should include representations that in all undertakings the Foreign Business Partner will make no payments of money, or anything of value, nor will such be offered, promised or paid, directly or indirectly, to any foreign officials, political parties, party officials, or candidates for public or political party office, to influence the acts of such officials, political parties, party officials, or candidates in their official capacity, to induce them to use their influence with a government to obtain or retain business or gain an improper advantage in connection with any business venture or contract in which the Company is a participant.

In addition to the above affirmative statement regarding conduct, you should have the following contractual clauses in your Foreign Business Partner contract.

• Indemnification: Full indemnification for any FCPA violation, including all costs for the underlying investigation.
• Cooperation: Require full cooperation with any ethics and compliance investigation, specifically including the review of Foreign Business Partner emails and bank accounts relating to your Company’s use of the Foreign Business Partner.
• Material Breach of Contract: Any FCPA violation is made a material breach of contract, with no notice and opportunity to cure. Further such a finding will be the grounds for immediate cessation of all payments.
• No Sub-Vendors (without approval): The Foreign Business Partner must agree that it will not hire an agent, subcontractor or consultant without the Company’s prior written consent (to be based on adequate due diligence).
• Audit Rights: An additional key element of a contract between a US Company and a Foreign Business Partner should include the retention of audit rights. These audit rights must exceed the simple audit rights associated with the financial relationship between the parties and must allow a full review of all FCPA related compliance procedures such as those for meeting with foreign governmental officials and compliance related training.
• Acknowledgment: The Foreign Business Partner should specifically acknowledge the applicability of the FCPA to the business relationship as well as any country or regional anti-corruption or anti-bribery laws which apply to either the Foreign Business Partner or business relationship.
• On-going Training: Require that the top management of the Foreign Business Partner and all persons performing services on your behalf shall receive FCPA compliance training.
• Annual Certification: Require an annual certification stating that the Foreign Business Partner has not engaged in any conduct that violates the FCPA or any applicable laws, nor is it aware of any such conduct.
• Re-qualification: Require the Foreign Business Partner re-qualify as a business partner at a regular interval of no greater than every three years.

Engaging in due diligence of a proposed Foreign Business Partner is but one of the many steps required to approve a person or entity who will represent your Company overseas, thereby creating a FCPA exposure. However, there are additional steps which you should employ internally in the Foreign Business Partner review process, some of which have been discussed above. Strong compliance terms and conditions are critical for the management of the relationship going forward. The Foreign Business Partner Review Committee must certify that the appropriate terms and conditions are in place to protect against a FCPA compliance violation and, should one occur, your Company can extricate itself immediately from doing business with such a a Foreign Business Partner instead of vendor.

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 can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2010

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