Welcome to Episode 6 of Compliance Man Goes Global podcast of FCPA Compliance Report International Edition. In this episode, we will focus on typical concepts (or probably myths) on Know Your Client -probably the most important process in corporate Compliance portfolio. We will do it in plain language so to say and in the simple game form. Moreover, to make the podcast handy and more appealing we attach respective illustration from the Compliance Man illustrated series, created by Timur Khasanov-Batirov.

For those of our listeners who are not aware about our format, in each podcast, we take two typical concepts from in-house compliance reality. We check out if these concepts work at emerging jurisdictions. For each podcast, we divide roles with Timur, a practitioner who focuses on embedding compliance programs at high-risk markets. One of us will advocate the concept identifying pros. The second compliance man will provide arguments finding cons and trying to convince audience that that we face a pure myth. As a result, we hopefully will be able to come up with some practical solutions for in-house compliance practitioners.

Tom: To start with, Tim, probably we should explain to our listeners why we called our today’s episode ‘Compliancebury Tales’?

Tim Khasanov-Batirov: We call today’s episode “Compliancebury Tales” alluding to The Canterbury Tales, a classical text of Geoffrey Chaucer, which many people heard of but never read. This is a very close analogue to our today’s topic.  

Tom: OK, Tim, let’s get started with the first tale so to say.

Myth #1 In practice there is no problem with definition of politically exposed person.  Tim, do you agree with this statement?

Tim Khasanov-Batirov: I would strongly disagree with this statement, Tom:  

Argument #1.

To start with, different legislations might have various definition for group, which we traditionally call Politically Exposed Persons. Thus, you might have a conflict of laws trying to prove that particular person is a PEP per US definition as used in FCPA enforcement for instance, while per local legislation outside the US, the person clearly is not considered a PEP.

Argument #2.

Even if we take legislation issued by international organizations like FATF guidance or for instance the EU’s directive, you still will have more questions than answers. In plain language in the end of the day, you never know for sure if daughter of former justice should be considered as a PEP.

Tom:  I think, Tim that there are some pros here as well:

Argument #1

Business people always know if person behind the contracting party has a power to influence things being affiliated with governmental or political establishment. So probably, it might be a good idea to approach manager in charge to understand the real credentials and affiliations of the potential counterpart.

 

Argument #2

It is about risk management. Based on applicable legislations and internal rules the organization can define in internal regulations categories of individuals, which fall into PEP definition for this particular company.

Argument #3

Of course this does not directly address the issue of family members or a relationship which can be even more difficult to ascertain, close personal friends.

Tim: Tom, I fully agree with you. Considering your second argument, I would add that it is very important from practical view to define precise definition of PEP in a plain and non-legalized language in the corporate policy. This will allow avoiding myriads of questions at implementation stage.

Tom: OK let’s go further on, Tim. We can formulate the next concept or maybe misconception in the following way:

Myth #2. We do KYC requesting many documents from potential business partner. We ask for incorporation documents, tax certificates, and much more. We do it for several years and it looks to be an adequate KYC format. Please do not complicate things by referring to just trendy but unclear terms as “justification of partner’s engagement” or “fair market value of remuneration to potential business partner.” Tim, will you agree with this statement?

Tim: While it is always good to obtain plenty of “legal” documents so to say, which by the way might the requirement per respective local tax legislation demanding due KYC it is dangerous to ignore justification and FMV concepts. These are not just new and fancy trends but still some companies do not pay attention to these things.

Argument #1.

What is justification in plain corporate language? Justification of business partner’s engagement is a reason why the company needs particular services along with reason why you need these services from that particular third party. Obviously, you cannot disregard this concept specifically operating at high-risk markets and taking in consideration FCPA enforcement practice.

Argument #2.

Why Fair Market Value is important from practical prospective? If a company engages a TPI, which interacts on its behalf with governmental authorities, the remuneration rate should be of fair market value. I strongly recommend defining FMVs if Western company engages TPIs from emerging markets. I referred to KYC in the Compliance man illustrated series series which accompanies this episode.

What are your views, Tom?

Tom: While I generally agree, Tim there are some bottlenecks which compliance practitioner has to consider.

Argument #1.

The business justification is so critical that is mandatory in my mind. It is one of the best ways to fully ‘operationalize’ compliance because if the business representative cannot justify why they want to do business with a new business partner, you company should not be doing business with that person. The business representative is much closer to the front lines of the business and a compliance practitioner not necessarily in the best position to define whether justification of TPI’s engagement is well grounded. Thus, it is critical for Compliance officer to establish trustworthy relations with business team aimed on getting impartial and non-biased opinion on justification for TPI’s engagement.

Argument #2.

Fair Market Value is a very important concept. The bottleneck here is the following: for some services like legal for instance the range of remuneration might vary dramatically. Another risk is that for some services (as business consulting for instance) it is highly difficult to define FMV at particular market.

Tim: Agreed, Tom. As key takeaways from today discussion, I think we can mention the following:

  • In the process of KYC Compliance officer, should not only collect incorporation documents but also having good contact with business team obtain justification of TPI’s engagement and ensure that TPI’s remuneration is of fair market value.

Tom: Fair enough, Tim. It looks to be a practical tip.

Join us for the next episode of Compliance Man Go Global episode of FCPA Compliance Report International Edition. Let’s bust more corporate compliance myths with us.

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