- Business Justification and Business Sponsor;
- Questionnaire to Third Party;
- Due Diligence on Third Party;
- Compliance Terms and Conditions, including payment terms; and
- Management and Oversight of Third Parties After Contract Signing.
If you cannot fully accomplish each step, that puts more pressure on the other steps. So if you are in country which limits your ability to look into the background of beneficial owners of corporations, you still may be able to move forward but you must perform additional monitoring or have other risk management protections going forward.
Step 1 – Business Justification
This concept is enshrined in the FCPA Guidance, which says “companies should have an understanding of the business rationale for including the third party in the transaction. Among other things, the company should understand the role of and need for the third party and ensure that the contract terms specifically describe the services to be performed.” The first step breaks down into two parts:
- Business Sponsor – Initially identify a business sponsor or primary contact for the third party within your company. This requires not only business unit buy-in but business unit accountability for the business relationship.
- Business Justification – The business unit must articulate a commercial reason to initiate or continue to work with the third party. You need to determine how this third party will fit into your company’s value chain and whether they will become a strategic partner or will they be involved in a one-off only transaction?
The purpose of the Business Justification is to document the satisfactoriness of the business case to retain a third party. The Business Justification should be included in the compliance review file assembled on every third party at the time of initial certification and again if the third party relationship is renewed.
Step 2 – Questionnaire
The term ‘questionnaire’ is mentioned several times in the FCPA Guidance. It is generally recognized as one of the tools that a company should complete in its investigation to better understand with whom it is doing business. I believe that this requirement is not only a key step but also a mandatory step for any third party that desires to do work with your company. I tell clients that if a third party does not want to fill out the questionnaire or will not fill it out completely that you should not walk but run away from doing business with such a party.
Below are some of the areas which I think you should inquire into from a proposed third party, they include the following:
- Ownership Structure: Describe whether the proposed third party 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 or are they Politically Exposed Persons (PEPs)? It is imperative that you obtain the identity of the Ultimate Beneficial Owner (UBO).
- Financial Qualifications: Describe the financial stability of, and all capital to be provided by, the proposed third party. You should obtain financial records, audited for 3 to 5 years, if available. Obtain the name and contact information for their banking relationship.
- Personnel: Determine whether the proposed agent will be providing personnel, particularly whether any of the employees are government officials. Make sure that you obtain the names and titles of those who will provide services to your company.
- Physical Facilities: Describe what physical facilities that will be used by the third party for your work. Be sure and obtain their physical address.
- References: Obtain names and contact information for at least three business references that can provide information on the business ethics and commercial reliability of the proposed third party.
- FCPA or Compliance Regime: Does the proposed third party have an anti-corruption/anti-bribery program in place? Do they have a Code of Conduct? Obtain copies of all relevant documents and training materials. Has the proposed third party received FCPA training?
One thing that you should keep in mind is that you will likely have pushback from your business team in making many of the inquiries listed above. However, my experience is that most proposed agents that have done business with US or UK companies have already gone through this process. Indeed, they understand that by providing this information on a timely basis, they can set themselves apart as more attractive to US businesses.
Step 3 – Due Diligence
Most compliance practitioners understand the need for a robust due diligence program to investigate third parties, but have struggled with how to create an inventory to define the basis of risk of each foreign business partner and thereby perform the requisite due diligence required under the FCPA. Getting your arms around due diligence can sometimes seem bewildering for the compliance practitioner. However, the information that you should have developed during the Business Justification and Questionnaire phase of the life cycle of third party management should provide you with the initial information to consider the level of due diligence that you should perform on third parties, which leads to Step 3 – due diligence.
Jay Martin, Chief Compliance Officer (CCO) at BakerHughes Inc. (BHI), often emphasizes that a company needs to evaluate and address its risks regarding third parties when he speaks on the topic. This means that an appropriate level of due diligence may vary depending on the risks arising from the particular relationship. So, for example, the appropriate level of due diligence required by a company when contracting for the performance of Information Technology services may be low, to reflect low risks of bribery on its behalf. Conversely, a business entering into the international energy market and selecting an intermediary to assist in establishing a business in such markets will typically require a much higher level of due diligence to mitigate the risks of bribery on its behalf.
Our British compliance cousins of course are subject to the UK Bribery Act. In its Six Principles of an Adequate Procedures compliance program, the UK Ministry of Justice (MOJ) stated, “The commercial organisation applies due diligence procedures, taking a proportionate and risk based approach, in respect of persons who perform or will perform services for or on behalf of the organisation, in order to mitigate identified bribery risks.” The purpose of this principle is to encourage businesses to put in place due diligence procedures that adequately inform the application of proportionate measures designed to prevent persons associated with a company from bribing on their behalf. The MOJ recognized that due diligence procedures act both as a procedure for anti-bribery risk assessment and as a risk mitigation technique. The MOJ said that due diligence is so important that “the role of due diligence in bribery risk mitigation justifies its inclusion here as a Principle in its own right.”
Step 4 – The Contract
You must evaluate the information and show that you have used it in your process. If it is incomplete, it must be completed. If there are Red Flags, which have appeared, these Red Flags must be cleared or you must demonstrate how you will manage the risks identified. In others words you must Document, Document and Document that you have read, synthesized and evaluated the information garnered in Steps 1-3. As the DOJ and SEC continually remind us, a compliance program must be a living, evolving system and not simply a ‘Check-the-Box’ exercise.
After you have completed Steps 1-3 and then evaluated and documented your evaluation, you are ready to move onto to Step 4 – the contract. In the area of compliance terms and conditions, the FCPA Guidance intones “Additional considerations include payment terms and how those payment terms compare to typical terms in that industry and country, as well as the timing of the third party’s introduction to the business.” This means that you need to understand what the rate of commission is and whether it is reasonable for the services delivered. If the rate is too high, this could be indicia of corruption as high commission rates can create a pool of money to be used to pay bribes. If your company uses a distributor model in its sales side, then it needs to review the discount rates it provides to its distributors to ascertain that the discount rate it warranted.
I have found that while it may not be easy, it is relatively simple to get a third party to agree to these, or similar, terms and conditions. One approach to take is that they are not negotiable. When faced with such a position on non-commercial terms many third parties will not fight such a position. There is some flexibility but the DOJ will require the minimum terms and conditions that it has suggested in the various Attachment Cs to the Deferred Prosecution Agreements (DPAs) through the life cycle management of a third party.
Step 5 – Management of the Relationship
I often say that after you complete Steps 1-4 in the life cycle management of a third party, the real work begins here in Step 5 – the management of the relationship. While the work done in Steps 1-4 are absolutely critical, if you do not manage the relationship it can all go downhill very quickly and you might find yourself with a potential FCPA or UK Bribery Act violation. There are several different ways that you should manage your post-contract relationship. Here we will explore some of the tools which you can use to help make sure that all the work you have done in Steps 1-4 will not be for naught and that you will have a compliant anti-corruption relationship with your third party going forward.
While the FCPA Guidance itself only provides that “companies should undertake some form of ongoing monitoring of third-party relationships”. Diana Lutz, writing in the White Paper by The Steele Foundation entitled “Global anti-corruption and anti-bribery program best practices”, said, “As an additional means of prevention and detection of wrongdoing, an experienced compliance and audit team must be actively engaged in home office and field activities to ensure that financial controls and policy provisions are routinely complied with and that remedial measures for violations or gaps are tracked, implemented and rechecked.”
Another noted commentator has discussed techniques to provide this management and oversight to any third party relationship. Carole Switzer, writing in the Compliance Week magazine, set out a five-step process for managing corruption risks for third parties.
- Screen – Monitor third party records against trusted data sources for red flags.
- Identify – Establish helplines and other open channels for reporting of issues and asking compliance related questions by third parties.
- Investigate – Use appropriately qualified investigative teams to obtain and assess information about suspected violations.
- Analyze – Evaluate data to determine “concerns and potential problems” by using data analytics, tools and reporting.
- Audit – Finally, your company should have regular internal audit reviews and inspections of the third party’s anti-corruption program; including testing and assessment of internal controls to determine if enhancement or modification is necessary.
I continually give my Mantra of FCPA compliance, which is Document, Document and Document. Each of the steps you take in the management of your third parties must be documented. Not only must they be documented but they must be stored and managed in a manner that you can retrieve them with relative ease. The management of third parties is absolutely critical in any best practices compliance program. As you sit at your desk pondering whether this assignment given to you by the CCO is a career-ending dead-end; you should take heart because there is clear and substantive guidance out there which you can draw upon.
For more information on this Hallmark, check out my book Doing Compliance: Design, Create and Implement an Effective Anti-Corruption Compliance Program, which is available through Compliance Week by clicking here.
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© Thomas R. Fox, 2016