There’s a view that working through third-party partners is a less risky way to do business in high-risk countries under the Foreign Corrupt Practices Act but that’s a misconception, compliance specialists say. If a third-party partner uses funds from your business to bribe a government official, you can be on the hook even if you didn’t explicitly green-light the action.
“Congress anticipated the use of third-party agents [by companies] to avoid actual knowledge of a bribe,” Maria González Calvet, an attorney with Ropes & Gray, said in a Lextegrity webcast. “It defined [actual knowledge] to eliminate the opportunity to avoid liability by saying that another person did it between themselves and a foreign official.”
In one of the most costly violations, Panasonic Avionics Corporation, a subsidiary of the electronics giant, was hit with a $280 million fine in 2018 for paying an official at a state-owned airline as a third-party consultant to get a leg up for the airline’s in-flight communications technology in a tender offer.
“The payments [to the consultant] were made through the president’s discretionary budget,” Casey Charkowick, risk transformation executive at Lextegrity, said. “That allowed them to circumvent their internal controls.”
Nothing in the company’s books suggested the consulting arrangement was anything other than a bribe.
“There were no articulable consulting services, no status reports, no documentation to substantiate the claim they used this individual as a consultant,” Charkowick said.
For general counsel or their compliance officer, having a way to spot this kind of thing early on is crucial from a risk management standpoint, because not taking the steps to identify problems won’t save your company from getting hit with an enforcement action.
“The FCPA imposes liability not only on those that have actual knowledge but also those that purposely avoid knowing,” said Calvet.
Even Oracle, a company known for its best-in-class compliance program, was hit with a $2 million fine from the Securities and Exchange Commission a decade ago when employees of a subsidiary leveraged margins from distributor discounts to create an off-books slush fund. The distributor was directed to use the funds to pay third parties for marketing expenses, although no marketing was done. The funds were going to officials.
The company uncovered the scheme internally but not until almost $4 million had gone to officials in the Indian government. Its self-disclosure probably helped it avoid criminal prosecution but the SEC still levied a civil fine on the company.
“The message here is: The SEC’s stance was that the concealment of parked funds is a blatant violation of Oracle’s internal controls,” said Charkowick. “So, it’s an example of how vigilant companies need to be.”
If you can set up a system to spot red flags early on you can be ahead of the game. One way to do that is to set a standardized policy for, say, distributor discounts, so when the discounts exceed the policy, your system will automatically kick them out for review. Distributor discounts can be a red flag because they’re often used for generating the money that’s deployed as bribes.
“The discounts don’t have to all be the same,” said Charkowick. “You can have different discounts by categories, regions, markets, product lines, and volume–things like that. You can say, ‘All these distributors in this bucket get this discount, and any additional discounts need to be justified by having nexus with a clear business purpose.’”
You can also set up alerts for anomalies in invoices and contracts, among other steps to take.
For example, Ralph Lauren in 2013 was hit with an $882,000 fine for paying a third-party consulting fee to a government official in Argentina in exchange for improper customs clearance of merchandise that the company was importing.
Employees directed the official to include on his third-party consulting invoices line items for loading expenses and complying with a stamp tax. Had the compliance system been set up based on a knowledge of the market and its rules, it could have flagged these line items as anomalies.
“They all had the same two line items on what were otherwise legitimate invoices,” said Charkowick. “It’s powerful if you can scrutinize these invoices and transactions. You might not stop all of them, but getting involved with the first one will help you stop the subsequent ones.”