FCPA Compliance and Ethics Blog

November 15, 2010

What’s in a Name: Agents, Resellers and Distributors under the FCPA

Filed under: FCPA,Foeign Business Partner — tfoxlaw @ 1:57 pm
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What is in a name? The terms agent, reseller and distributor are sometimes used interchangeably in the business world. However in the legal world they usually have distinct definitions. An agent can be generally defined as is a person who is authorized to act on behalf of another to create a legal relationship with a Third Party. An agent can also be a person who makes introductions and generally facilitates relationships between the seller of goods or services and end-using buyer. Such an agent usually receives some type of percentage of the final sale as his commission. An in-country national agent is often required in most Middle East and Far East countries. A reseller can be generally defined as a company or individual that sells goods to an end-using buyer. A reseller does not take title and thereby own the goods; the reseller is usually a conduit from the seller to the end-using buyer. A reseller usually receives a flat commission for his services, usually between 5-10% of the final purchase price. This format is often used in the software and hardware industries. A distributor can be generally defined as a company or individual which purchases a product from an original equipment manufacturer (OEM) and then independently sells that product to an end user. A distributor takes title, physical possession and owns the products. The distributor then sells the product again to an end-using purchaser. The distributor usually receives the product at some discount from the OEM and then is free to set his price at any amount above what he paid for the product. A distributor is often used by the US manufacturing industry to act as a sales force outside the US. 

The landscape of the Foreign Corrupt Practices Act (FCPA) is littered with cases involving both agents and resellers are they are the most clearly acting as representatives of the companies whose goods or services they sell for in foreign countries. However many US businesses believe that the legal differences between agents/resellers and distributors insulate them from FCPA liability should the conduct of the distributor violate the Act. They believe that as the distributor takes title and physical possession of the product, the legal risk of ownership has shifted to the distributor. If the goods are damaged or destroyed, the loss will be the distributor’s not the US business which manufactured the product. Under this same analysis, many US companies believe that the FCPA risk has also shifted from the US company to the foreign distributor. However such belief is sorely miss-placed. 

As almost everyone knows, the FCPA prohibits payments to foreign officials to obtain or retain business or secure an improper business advantage. But many US companies view distributors as different from other types of sales representatives such as company sales representatives, agents, resellers or even joint venture partners, for the purposes of FCPA liability. However the Department of Justice (DOJ) takes the position that a US company’s FCPA responsibilities extend to the conduct of a wide range of third parties, including the aforementioned company sales representatives, agents, resellers, joint venture partners but also distributors. No U.S. company can ignore signs that its distributors may be violating the FCPA. Company management cannot engage in conscious avoidance to the activities of a distributor that the company has put into a business position favorable to engaging in FCPA violations. Court interpretation of the FCPA has held that it is applicable where conduct violative of the Act is used to “to obtain or retain business or secure an improper business advantage” which can cover almost any kind of advantage, including indirect monetary advantage even as nebulous as reputational advantage. 

This scenario played out in China from 1997 to 2005 through AGA Medical Corporation. The Minnesota-based firm manufactured products used to treat congenital heart defects. To boost is China sales, AGA worked through its Chinese distributor. AGA sold products at a discounted rate to its Chinese distributor. This distributor then took some of the difference between his price from the equipment manufacturer AGA and the price he sold the equipment to Chinese hospitals to and paid corrupt payments to Chinese doctors to have them direct their government-owned hospitals to purchase AGA’s products. Its sales in China for the period were about $13.5 million. The Chinese distributor was found to have paid bribes in China of at least $460,000 to doctors in government-owned hospitals and patent-office officials. In 2008, AGA agreed to pay a $2 million criminal penalty and enter into a deferred prosecution agreement with the Department of Justice to settle Foreign Corrupt Practices Act violations. 

The same game was played by a Volvo subsidiary, Volvo Construction Equipment International (“VCEI”) when it used a Tunisian distributor to facilitate additional sales of its products to Iraq. VCEI reduced its prices to enable the distributor to make the illegal payments based on bogus after-sales service fees. Volvo’s 2008 settlement with the SEC included an agreement permanently enjoining it from future violations of Sections, ordering it to disgorge $7,299,208 in profits plus $1,303,441 in pre-judgment interest, and to pay a civil penalty of $4,000,000. In addition to this fine imposed by the SEC, Volvo also paid a $7,000,000 penalty pursuant to a deferred prosecution agreement with the DOJ. 

So what is in a name? Do we simply look to Shakespeare and his immortal words, “”What’s in a name? That which we call a rose; By any other name would smell as sweet.” Unfortunately I do not think the answer is quite so ethereal. It is more down to earth. If it walks like a duck and quacks like a duck, it probably is a duck. If you have a distributor, it must be subjected to the same FCPA scrutiny and management as an agent, reseller or joint venture partner. 

                                    *                      *                      * 

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

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

February 21, 2010

Establishing Relationships with Foreign Business Partners—Due Diligence, Due Diligence and then Due Diligence

There are several critical components in the selection, use and retention of any Foreign Business Partner, such as agents, resellers, joint venture partners or distributors. In view of the critical risks a US Company must manage when entering into a relationship with a Foreign Business Partner, the US Company should, prior to establishing the relationship, kick off the risk management process by initiating thorough due diligence on the proposed Foreign Business Partner. The due diligence process should contain, at a minimum, inquiries into the following areas:

• Need for the relationship with a Foreign Business Partner: The Company Business Team or Business Person should articulate the business case for the proposed Foreign Business Partner relationship. This must be approved by management before it goes to legal or compliance for review.

• Credentials: List the critical reasons for selection of the proposed Foreign Business Partner. This should include a discussion of the business partner’s background and experience.

• Ownership Structure: Describe whether the proposed Foreign Business Partner is a government or state-owned entity, and the nature of its relationship(s) with local, regional and governmental bodies. Are there any members of the business partner related, by blood, to governmental officials?

• Financial Qualifications: Describe the financial stability of, and all capital to be provided by, the proposed Foreign Business Partner. Obtain financial records, audited for 3 to 5 years, if available.

• Personnel: Determine whether the Foreign Business Partner will be providing personnel, particularly whether any of the employees are government officials. Obtain the names and titles of those who will provide services to the US Company.

• Physical Facilities: Describe what physical facilities will be provided by the Foreign Business Partner. Who will provide the necessary capital for their upkeep?

• Reputation: Describe the business reputation of the proposed Foreign Business Partner in its geographic and industry-sector markets.

These due diligence inquiries are required under the Federal Sentencing Guidelines and the guidance offered by the Department of Justice (DOJ) Opinion Releases and the publicly released Plea Agreements and Deferred Prosecution Agreements (DPA) entered into by US companies who admit to violating the Foreign Corrupt Practices Act (FCPA). This due diligence should be recorded and maintained by the US Company for review, if required, by a governmental agency. Some of the due diligence can be handled by the US Company’s in-house legal and/or compliance groups. However, it is recommended that for any high risk Foreign Business Partner, an outside forensic auditing firm and outside legal counsel be retained to conduct the due diligence investigations. This brings a level of expertise usually not available within a corporation plus an outside perspective less susceptible to in-company business pressures.

After this initial inquiry is concluded the US Company should move forward to perform a background check on a prospective Foreign Business Partner by using the following resources:

• References: Obtain and contact a list of business references.

• Embassy Check: Obtain information regarding the intended business partner from the local US Embassy, including an International Company Profile Report.

• Compliance Verification: Determine if the Foreign Business Partner, and those person within the Foreign Business Partner who will be providing services to the US Company, have reviewed or received FCPA training.

• Foreign Country Check: Have an independent third party, such as a law firm; investigate the business partner in its home country to determine compliance with its home country’s laws, licensing requirements and regulations.

• Cooperation and Attitude: One of the most important inquiries is not legal but based upon the response and cooperation of the Foreign Business Partner. Did the business partner object to any portion of the due diligence process? Did it object to the scope, coverage or purpose of the FCPA? In short, is the business partner a person or entity that the US Company is willing to stand up with under the FCPA?

After a company completes these due diligence steps, there should be a thorough review by the Board, or other dedicated Management Committee, on the qualifications of the proposed foreign business relationship partner. It is critical that the reviewing Committee is not subordinate to the US company’s business unit which is responsible for the business transactions with the Foreign Business Partner. This review should examine the adequacy of due diligence performed in connection with the selection of overseas partners, as well as the Foreign Business Partner’s selection of agents, subcontractors and consultants which will be used for business development on behalf of the US Company.

The steps listed herein do not include the use of, or continued management of, a Foreign Business Partner. These steps need to be taken by all US Companies entering into, or already engaged in, a relationship with Foreign Business Partners as the FCPA applies to all US Companies, whether public or private. Remember, due diligence, due diligence and once that has been completed; more due diligence.

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

February 16, 2010

What’s in a Name: Agents, Resellers and Distributors under the FCPA

What is in a name? The terms agent, reseller and distributor are sometimes used interchangeably in the business world. However in the legal world they usually have distinct definitions. An agent can be generally defined as is a person who is authorized to act on behalf of another to create a legal relationship with a Third Party. An agent can also be a person who makes introductions and generally facilitates relationships between the seller of goods or services and end-using buyer. Such an agent usually receives some type of percentage of the final sale as his commission. An in-country national agent is often required in most Middle East and Far East countries. A reseller can be generally defined as a company or individual that sells goods to an end-using buyer. A reseller does not take title and thereby own the goods; the reseller is usually a conduit from the seller to the end-using buyer. A reseller usually receives a flat commission for his services, usually between 5-10% of the final purchase price. This format is often used in the software and hardware industries. A distributor can be generally defined as a company or individual which purchases a product from an original equipment manufacturer (OEM) and then independently sells that product to an end user. A distributor takes title, physical possession and owns the products. The distributor then sells the product again to an end-using purchaser. The distributor usually receives the product at some discount from the OEM and then is free to set his price at any amount above what he paid for the product. A distributor is often used by the US manufacturing industry to act as a sales force outside the US.

The landscape of the Foreign Corrupt Practices Act (FCPA) is littered with cases involving both agents and resellers are they are the most clearly acting as representatives of the companies whose goods or services they sell for in foreign countries. However many US businesses believe that the legal differences between agents/resellers and distributors insulate them from FCPA liability should the conduct of the distributor violate the Act. They believe that as the distributor takes title and physical possession of the product, the legal risk of ownership has shifted to the distributor. If the goods are damaged or destroyed, the loss will be the distributor’s not the US business which manufactured the product. Under this same analysis, many US companies believe that the FCPA risk has also shifted from the US company to the foreign distributor. However such belief is sorely miss-placed.

As almost everyone knows, the FCPA prohibits payments to foreign officials to obtain or retain business or secure an improper business advantage. But many US companies view distributors as different from other types of sales representatives such as company sales representatives, agents, resellers or even joint venture partners, for the purposes of FCPA liability. However the Department of Justice (DOJ) takes the position that a US company’s FCPA responsibilities extend to the conduct of a wide range of third parties, including the aforementioned company sales representatives, agents, resellers, joint venture partners but also distributors. No U.S. company can ignore signs that its distributors may be violating the FCPA. Company management cannot engage in conscious avoidance to the activities of a distributor that the company has put into a business position favorable to engaging in FCPA violations. Court interpretation of the FCPA has held that it is applicable where conduct violative of the Act is used to “to obtain or retain business or secure an improper business advantage” which can cover almost any kind of advantage, including indirect monetary advantage even as nebulous as reputational advantage.

This scenario played out in China from 1997 to 2005 through AGA Medical Corporation. The Minnesota-based firm manufactured products used to treat congenital heart defects. To boost is China sales, AGA worked through its Chinese distributor. AGA sold products at a discounted rate to its Chinese distributor. This distributor then took some of the difference between his price from the equipment manufacturer AGA and the price he sold the equipment to Chinese hospitals to and paid corrupt payments to Chinese doctors to have them direct their government-owned hospitals to purchase AGA’s products. Its sales in China for the period were about $13.5 million. The Chinese distributor was found to have paid bribes in China of at least $460,000 to doctors in government-owned hospitals and patent-office officials. In 2008, AGA agreed to pay a $2 million criminal penalty and enter into a deferred prosecution agreement with the Department of Justice to settle Foreign Corrupt Practices Act violations.

The same game was played by a Volvo subsidiary, Volvo Construction Equipment International (“VCEI”) when it used a Tunisian distributor to facilitate additional sales of its products to Iraq. VCEI reduced its prices to enable the distributor to make the illegal payments based on bogus after-sales service fees. Volvo’s 2008 settlement with the SEC included an agreement permanently enjoining it from future violations of Sections, ordering it to disgorge $7,299,208 in profits plus $1,303,441 in pre-judgment interest, and to pay a civil penalty of $4,000,000. In addition to this fine imposed by the SEC, Volvo also paid a $7,000,000 penalty pursuant to a deferred prosecution agreement with the DOJ.

So what is in a name? Do we simply look to Shakespeare and his immortal words, “”What’s in a name? That which we call a rose; By any other name would smell as sweet.” Unfortunately I do not think the answer is quite so ethereal. It is more down to earth. If it walks like a duck and quacks like a duck, it probably is a duck. If you have a distributor, it must be subjected to the same FCPA scrutiny and management as an agent, reseller or joint venture partner.

                                    *                      *                      *

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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