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

February 20, 2012

Lin-sanity, the Mintz Group “Where the Bribes Are” Map and Compliance Programs

Lin-sanity has reached near epic proportions, even down here in Texas. Who can resist the underdog story of a twice cut Asian-American, Harvard educated, point guard making it on one of the biggest basketball stages in the world, Madison Square Garden. (Yes one of those brilliant teams that cut Lin was the Houston Rockets, thanks again David Stern for nixing the 3-way Lakers/Hornets/Rockets trade that probably would have kept Lin in Houston.) Although the Knicks finally lost a game after Lin became the starter, or as @srubenfeld tweeted “Well. It had to end, but against the Hornets?”; Lin-sanity still rages. There are many angles to Lin-sanity that we could explore that would apply as lessons in the compliance world; cultural sensitivity and cultural stereotypes being two that spring to mind.

However, today I would like to focus on issues raised in an article from the Friday, February 17, 2012 edition of the New York Times (NYT), entitled “Truck Driver’s Analysis Predicted Lin’s Professional Potential”, by Benjamin Hoffman. In the article Hoffman profiled a FedEx truck driver, Ed Weiland, who moonlights as a contributor to HoopsAnalyst.com. Prior to the NBA draft, Weiland wrote a report for HoopsAnalyst.com, in which he analyzed Lin’s stats from Harvard and concluded that Lin “might be among the best point guards available” in the 2010 draft. How is that for ‘spot-on’?

One of the key points in the NYT article is the increasing number of “seemingly ordinary citizens outdoing the work of people who are paid to analyze players.” I would note that he lives in Bend, Oregon, which, based upon my personal knowledge, I can assure you, is not on the “Top Hoops City in America Map.” Weiland believes that one of the reasons for such success is the “lack of direct relationship to the game.” Hoffman quoted Rany Jazayerli for the proposition that “for insiders, it’s hard to be objective, and even harder to write objectively when you have to deal with the people you’re writing about.” Also, while the pool of journalists covering the sport is finite, the “pool of outsiders tracking a sport is endless. Out of such a pool, some bright people are likely to emerge.”

Tools To Enhance Your Compliance Risk Assessment

So what lessons can the compliance professional draw from Lin-sanity? I would like to put forth two. The first is that there is a wealth of information available which can help you inform your compliance program beyond just the basics. Last week, I was a co-presenter, with Patrick Kelkar of The Mintz Group, on a webinar hosted by Ethics*Point. The featured discussion of the webinar was about The Mintz Group “Where the Bribes Are” heat map, which gives a complete review of all Foreign Corrupt Practices Act (FCPA) enforcement actions, by industry and location, in an interactive map. This tool supplements such standard tools as the Transparency International (TI) Corruptions Perceptions Map with great data. It is available for use free of charge on The Mintz Group website. By using this heat map, you can further evaluate your compliance risks by more than simply geography and then put risk management processes in place if you are moving to a new business line or into a new business area.

In addition to showing some of the above information, The Mintz Group also has some useful information for what it does not show. For instance, there are only a few FCPA cases in Russia and none in Ukraine, two countries consistently ranked among the more corrupt in TI’s Corruption Perception Index.  From The Mintz Group’s work in the region, the heat map indicates that some foreign companies have chosen not to do business there because of the demands for bribes. That’s the case in other areas of the world as well.

Listening to Your Pool of Talent

One of the things often overlooked, in not only the implementation but the ongoing enhancement of a compliance program, is the wealth of talent that is available to your compliance department in the form of your employee base. I have previously written about the usefulness of the local compliance champion and how companies as diverse as Coca-Cola and Halliburton make use of such local personnel in their overall compliance efforts. However, there are many people in your company who not only want to do business in the right way but want their company to succeed in such efforts. They can be some of your greatest assets and resources. Simply because someone in the field pushes back on an initiative that you might put forward does not mean they are against it. You need to listen to such information because there might well be information in that ‘push back’ that you can utilize in your compliance program going forward.

Almost every American of every stripe pulls for the underdog. At the end of the day, that may be the final reason Lin-sanity is so compelling. Nevertheless if you look closer not only was the talent there, but the underlying information on Lin’s college performance was there, analyzed and made available to you, courtesy of Ed Weiland. Similarly, there is information out there and available to you to continually assess your compliance risks. The Mintz Group heat map of “Where the Bribes Are” is but one tool available to you, at no charge, which allows you to have a more nimble and nuanced compliance program. Additionally I think the second message of Ed Weiland is equally compelling, that being that there are very talented people out there in your organization who are waiting for the opportunity to help make the company a better company by doing business in a compliant manner. While they may not have written a full treatise like Ed Weiland, they are out there waiting for you to listen to them. Do not be afraid to take that opportunity.

============================================================================================

There is a great debate on Tuesday, February 21 at noon EST between my ‘This Week in FCPA‘ colleague Howard Sklar and the FCPA Professor on whether the FCPA needs to be amended to add a compliance defense. It will be great fun and it’s free from at Securities Docket. You can obtain information and register by clicking here.

============================================================================================

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

Blog at WordPress.com.