Internal controls are a key tool to operationalize your third party risk management program. Initially, a compliance practitioner should perform an analysis of any third party representative to provide insight into the pattern of dealings with such third parties and, therefore, the areas where additional controls should be considered. The basic internal controls, that should be a part of any financial controls system, include some or all of the following:

  • A control to correlate the approval of payments made to contracts with third party representatives and your company’s internal system for processing invoices.
  • A control to monitor all situations in which funds can be sent outside the US, in whatever form your company might use, which could include accounts payable computer checks, manual checks, wire transfers, replenishment of petty cash, loans, advances or other forms.
  • A control for the approval of sales discounts to distributors.
  • A control for the approval of accounts receivable write-offs.
  • A control for the granting of credit terms to third parties or customers outside the US.
  • A control for agreements for re-purchase of inventory sold to third parties or customers.
  • A control for opening of bank accounts specifically including accounts opened at request of an agent or a customer.
  • A control for the movement / disposal of inventory.
  • A control for the movement / disposal of movable fixed assets.
  • A control for execution and modification of contracts and agreements outside the US.

There should also be internal control needs based on activities with third party representatives. These could include some or all of the following internal controls:

  • A control for the structure and enforcement of the Delegation of Authority.
  • A control for the maintenance of the vendor master file.
  • A control around expense reports received from third parties.
  • A control for gifts, entertainment and business courtesy expenditures by third party representatives.
  • A control for charitable donations.
  • A control for all cash / currency, inventory, fixed asset transactions, and contract execution in countries outside the US where the country manager has final authority.
  • A control for any other activity for which there is a defined corporate policy relating to FCPA.

While that may appear to be an overly exhaustive list, there were four significant controls the compliance practitioner implement initially. They include: (1) Delegation of Authority (DOA); (2) Maintenance of the vendor master file; (3) Contracts with third parties; and (4) Movement of cash / currency.

A DOA should reflect the impact of corruption risk including both transactions and geographic location so that a higher level of approval for matters involving third parties and for fund transfers and invoice payments to countries outside the US would be required inside an organization. Often, a DOA is prepared without much thought given to FCPA risks. Unfortunately once a DOA is prepared it is not used again until it is time to update for personnel changes. Moreover, it is often not available, not kept current, and/or did not define authority in a way even the approvers could understand it. Therefore it is incumbent that the DOA be integrated into a company’s accounts payable (AP) processing system in a manner that ensures all high-risk vendor invoices receive the proper visibility. To achieve this you should identify the vendors within the vendor master file so payments are flagged for the appropriate approval BEFORE they are paid.

Furthermore if a DOA is properly prepared and enforced, it can be a powerful preventive tool for FCPA compliance. For example, consider a wire transfer of $X between company bank accounts in the US might require approval by the Finance Manager at the initiating location and one officer. However, a wire transfer of $X to the company’s bank account in Nigeria, could require approval by the Finance Manager, a knowledgeable person in the Compliance function, and one officer. In this situation, the DOA should specify who must give the final approval for engaging third parties. Moreover, the DOA should address replenishment of petty cash funds in countries outside the US, as well as approval of expense reports for employees who work outside the US (including those who travel from the US to work outside the US).

Some believe the vendor master file, can be one of the most powerful PREVENTIVE control tools largely because payments to fictitious vendors are one of the most common occupational frauds. The vendor master file should be structured so that each vendor can be identified not only by risk level but also by the date on which the vetting was completed and the vendor received final approval. There should be electronic controls in place to block payments to any vendor for which vetting has not been approved. Next manual controls are needed over the submission, approval, and input of changes to the vendor master file. These controls include verification that all vendors have been approved before their information (and the vendor approval date) is input into the vendor master. Finally, manual controls are also needed when “one time” vendors are requested, when a vendor name and/or vendor payment information changes are submitted.

Near and dear to my heart as a lawyer, contracts with third parties can be a very effective internal control which works to prevent nefarious conduct rather than simply as a detect control. I would caution that for contracts to provide effective internal controls, relevant terms of those contracts (commission rate, whether business expenses can be reimbursed, use of subagents, etc.,) should be extracted and available to those who process and approve vendor invoices. If there are nonconforming service descriptions, commission rates, etc., present in a contract such terms must be approved not only by the original approver but also by the person so delegated in the DOA Unfortunately contracts are not typically integrated into the internal control system. They are left off to the side on their own, usually gathering dust in the legal department file room.

One FCPA enforcement action was an excellent example of the lack of internal control over the disbursements of funds and movement of currency because you had the country manager delivering bags of cash to a government official to obtain or retain business. All situations where funds can be sent outside the US (AP computer checks, manual checks, wire transfers, replenishment of petty cash, loans, advances, etc.,) should be reviewed from a compliance risk standpoint. Further, within a company structure you need to identify the ways in which a country manager (or a sales manager, etc.,) could cause funds to be transferred to their control and to conceal the true nature of the use of the funds within the accounting system.

All wire transfers outside the US should have defined approvals in the DOA, and the persons who execute the wire transfers should be required to evidence agreement of the approvals to the DOA and wire transfer requests going out of the US should always require dual approvals. Lastly, wire transfer requests going outside the US should be required to include a description of proper business purpose.

Never forget that internal controls are in reality, simply good financial controls. The internal controls that he detailed for third party representatives in the compliance context will help to detect fraud, which could well lead to the prevention of bribery and corruption.

Three Key Takeaways

  1. Internal controls are a key component of any operationalized compliance program.
  2. Internal controls are good financial controls.
  3. The top four internal controls for compliance are: (a) Delegation of Authority (DOA); (b) Maintenance of the vendor master file; (c) Contracts with third parties; and (d) Movement of cash / currency.

 

This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos 3PM accelerator, the leading platform for third party risk management. To learn more, go to www.opus.com.

 

 

 

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