The 2017 World Series Champions, the Houston Astros, had their home opener on Monday evening. After 56 years and a few minutes of frustration (more on that later) the World Series (WS) banner was unveiled. As it is metal it could not be unfurled. It was a moment every Astros fan had literally waited their lifetime to see. Yet even with this triumphant moment the hometown heroes provided a few distinct lessons learned for the compliance practitioner, one around red flags.

As the WS banner is a metal sign, there was a black covering over it. Unfortunately, the unfurling team could not pull the cover to reveal the WS banner. One might have assumed the unfurling team had practiced it, as the event was done live in front of a sold out MinuteMaid Park and the nation’s television watching sports aficionados (up until 8:20 PM when the NCAA basketball championship began). Yet for over one painful minute, they could not pull down the cover. I knew they were in big trouble when one of the unfurling team could be observed scurrying up (with no safety harness to be seen) the pole the WS banner was attached to, wielding a machete to cut the lines holding the cover over the banner. But even that was not enough as unfurling team had to employee a leaf blower, extended out on a pole (how safe was that?) to then actually blow the cover off the banner. The Keystone Kops could not have done a better skit.

It did provide the fans in the stands more and more time to scream their collective lungs out in anticipation and when the unfurling team finally got the cover off the WS banner, the stadium exploded with 56 years of frustration to the baseball gods. Within some 15 minutes both Sports Illustrated and ESPN online publications had stories about the Astros FUBAR. Oh, and the Astros shut out the Baltimore Orioles 5-0.

The first lesson for the compliance practitioner is that you should actually test your compliance program in high-risk/high-profile situations. The unfurling team likely did practice their unfurling regime but apparently failed to do so with the stadium roof open and the wind blowing some 20 MPH at the top of the stadium. A likely reason – it was too costly to open the roof to practice. This means that the unfurling practice may have well been staged in a closed environment, with no risk factors present. Does that sound like practicing your program in the real-world?

I had hoped the WS banner would have been a real flag which would have been unfurled and raised up a flagpole as the Astros did when they unveiled their 2005 National League (NL) banner but that was not too be. However, even a metal banner can stand in for our first and only World Series flag so once again, congratulations to the 2017 World Series Champions, the Houston Astros, who are now in a quest for WS banner Number 2.

Before the comedy club act in unveiling the banner, I had intended to use this event to discuss red flags that may appear during the due diligence approval process regarding use of a Third-Party Business Representative, under the Foreign Corrupt Practices Act (FCPA) or similar anti-corruption law. Now the Astros have presented us with another set of lessons for the compliance practitioner.

The compliance professional should pay careful attention to details and suspicious issues that need to be address with adequate care.  If the Business Sponsor or any personnel involved in the due diligence process becomes aware of any “red flags” they should be documented via a note, together with an appropriate clearance of the red flag in the file and included in the completed due diligence documentation. Please note the below list is not all-inclusive, for just as the Astros may have never foreseen they would actually unveil a WS banner, it did come to pass.

Location-related Red Flags

  1. The Third-Party Business Representative (“third-party”) (e.g., sales representative, agent, consultant with “representative” function, distributor, joint venture or joint venture partner, contractor or subcontractor with “representative” function, etc.) is based in, or is expected to operate on behalf of the Company in, a country with a perceived high risk of corruption.
  2. The transaction in question or the third-party is located in a country where there is a history of widespread corruption.

Relationship-related Red Flags

  1. The third-party has a current business, family, or other close personal relationship with a foreign official.
  2. The third-party is or had recently been a foreign official.
  3. A customer or foreign official recommends or insists on the use of the third-party.
  4. Only qualification which the third-party offers is influence over foreign officials.

Contract-related Red Flags

  1. The third-party refuses to agree to comply with the FCPA and/or Company’s FCPA Due Diligence Policy or similar anti-corruption laws.
  2. The third-party refuses to agree to comply with a no facilitating payments policy.
  3. The third-party insists on unusual or suspicious contracting procedures.
  4. The third-party refuses to be subject to an audit.
  5. The third-party requests that agreement be backdated or altered in some way to falsify information.
  6. The third-party insists on a transaction structure which is opaque.
  7. The third-party insists on a transaction structure which does not warrant a business justification.

Reputation (or Operation)-related Red Flags

  1. The third-party has a poor business reputation or has faced allegations of bribes, kickbacks, fraud or other wrongdoing.
  2. The third-party does not have an office or staff or its office or staff does not appear to be adequate to perform the required services.
  3. The third-party insists that its identity remain confidential or refuses to divulge the identity of its owners.
  4. Due diligence reveals that the third-party is using a shell company or has unorthodox corporate structure.
  5. The third-party does not have significant experience or proper qualifications for your business or the specific project/assignment.
  6. The third-party uses unauthorized sub-agents or subcontractors which it refuses to identify.
  7. The third-party frequently entertains government officials in a lavish manner.
  8. The third-party will provide or is providing no or very little actual services.
  9. Lack of, or failure of the third-party to provide references.
  10. References provided by the third-party turn out to be non-existent or questionable.
  11. The third-party makes suggestion(s) that violates local laws, FCPA, or Company policies, standards or procedures.
  12. General lack of truthfulness or full disclosure on the part of the third-party.
  13. Payment-related Red Flags.
  14. The third-party requests payment for an off-the-books account.
  15. Requests are made by the third-party for false invoices or other misleading documents.
  16. The fee or commission to be paid to the third-party is unusually large or disproportionate to services to be rendered.
  17. The third-party requests payment for an invoice that does not reflect the services that were provided.
  18. Payment mechanism requested by the third-party is secretive, unusual or opaque.
  19. The third-party submits inflated or inaccurate invoices.
  20. The third-party requests cash or bearer instrument payments.
  21. The third-party requests payment in a jurisdiction outside the country in which services are provided or to be provided.
  22. The third-party asks that a customer be granted an excessive credit line.
  23. The third-party requests unusual bonus or special payments.
  24. The third-party requests an unusual advance payment or a change in payment rate that is not authorized by original contract.
  25. The third-party claims unusual expenses and/or fails to provide adequate documentation for such expenses.
  26. The third-party asks for payment to be made to a person or entity not specifically named as the party to the contract.
  27. The third-party asks for payment in a form not in accordance with local laws.
  28. The third-party refuses or fails to confirm or represent that there have been and will be no improper payments that violate FCPA, Company policies, local or foreign laws.
  29. The third-party uses phrases like “money is needed to get the business” or “money is needed to make the necessary arrangements,” etc.

Last year brought the city of Houston its first Major League Baseball (MLB) championship. After the destruction wrought by Hurricane Harvey, it was a more than welcome relief. All of our grandfathers, fathers and uncles who took us to games these many years at Colt Stadium, the Astrodome and eventually MinuteMaid Park were smiling last night. For the compliance practitioner, you might take this opportunity to test your compliance program in real-world conditions and review your consideration of red flags.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2018

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