Released 40 years ago this month, the Al Stewart album Past Present and Future was a departure from his earlier folk based work. In this album, Stewart focused on historical themes. I was particularly drawn to two long songs, “Roads To Moscow” which is Stewart’s tribute to the Russian author and modern day philosopher Aleksandr Solzhenitsyn and “Nostradamus” which is about the famous supposed prophet and his prophecies.
I thought about Stewart’s album title while I was listening to Frank Taber, Director, Global Ethics and Compliance for Hospira, Inc. (HSP) speak at the Society of Corporate and Compliance (SCCE), 2013 national Compliance and Ethics Institute on the topic of “Third Party Risk-Based Anti-Bribery Due Diligence”. While most compliance practitioners certainly are aware of the need to perform due diligence, Tabor’s presentation was not only a very good refresher on the topic but he presented the information together that gave me pause to think about due diligence in a new way. Hence when he said past, present and future; I thought about Stewart’s album as a new way to think about due diligence. These ideas became even more interesting when considered in the light of GlaxoSmithKline PLC (GSK) issues in China.
Obviously, your company wants to know who they are doing business with, whether it is a person or entity as a sales chain partner, joint venture partner or other business relationship. This is also true for acquisitions. But more than wanting to know about who you are doing business with, due diligence is an important tool in the overall international efforts to fight bribery and corruption. It also supports your company’s Code of Conduct, protects your reputation and allows early discovery of deal-breakers before it is too late. Due diligence also helps to provide a legal defense to anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. In addition to the background and reputation, you need to know a party’s qualifications to do business with you.
One of the things that GSK apparently did not check on was the qualifications of the lead travel agency it used in China. If it had done so, it may well have discovered that the principals of the lead travel agency did not have any experience in the business. If this had been reviewed by a compliance professional in the corporate office, it should have been red flagged for additional investigation.
What are the types of information that you should obtain in due diligence? Tabor had a good list for you to begin with, which included the following.
- Identification – It is important to obtain the basic identification information on a third party. This includes, names, addresses, phone numbers, basic license information, the identities of officers, directors, shareholders and those who will handle your business or be your point of contact. You need to obtain corporate regulatory and partnership filings, a list of countries where it does business and find out if there have been any name changes in the past five years.
- Financial – Your financial review should be based on three years of audited (if any) financial records.
- Capabilities – This should include a review of the party’s facilities, support services, amount of work outsourced, number of employees and number of years in business. You should also ask for a list of its top 10 customers.
- Government Exposure – You need to determine if the third party does business with any foreign governments or government officials and if there are any government officials otherwise involved with the third party. This extends to relatives and close friends of government officials.
- Enforcement Actions – Here you need to determine if the party or any of its officials have ever been charged with criminal conduct or been party to criminal proceedings. You also need to make the same inquiries for civil proceedings or regulatory actions. You should review news media stories on the party.
- Internal Control Environment – You should review the party’s compliance program, including their Code of Conduct. You should also test their employees’ familiarity with the FCPA or Bribery Act. See if the company has a written policy regarding gifts, travel and entertainment and if the employees are trained on same.
Tabor discussed how you should respond to negative information which may be uncovered during the due diligence process. He began though by emphasizing it is important to have a plan in place so that your internal team can address any negative issues that might arise. I was intrigued by his assertion that you can use due diligence as part of a risk management plan going forward. Some of the mitigation options he discussed were to share your Code of Conduct with the third party and draw attention to your internal reporting line for questions and concerns. You should clearly communicate that bribery and corruption is not tolerated. You may need to use the due diligence you have obtained to review and improve existing contracts to reflect this priority. You may suggest that the third party adopt a compliance regime similar to your program or provide training on specific issues.
Tabor also spoke about the need for ongoing due diligence monitoring. I agree that under most of the recent expert commentary on what constitutes a best practices compliance program, under laws from different countries and in a wide variety of industries, the ongoing monitoring of third parties is viewed as critical. This is because any due diligence performed on a third party during the time which may lead up to a contract, would only be scheduled to be performed again during the next qualification period, typically every two to three years. Much can happen during this ensuing time frame. I believe that the “Future” prong of due diligence monitoring is a step that companies need to develop in order to monitor their third parties during the life of the contract rather than simply at the start of the qualification process.
Tabor’s three pronged approach gave me a new way to see due diligence. Once again, Tabor’s presentation emphasized to me the ongoing, organic nature of a compliance program. If you obtain more information you can make adjustments to manage your risk more fully, completely and certainly more timely.
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© Thomas R. Fox, 2013