Auditing of third parties is critical to any best practices compliance program and an important tool in operationalizing your compliance program. This is a key manner in which a company can manage the third party relationship after the contract is signed and one which the government will expect you to engage in going forward.

You should plan out four to six weeks in advance, you should perform the audit with your legal counsel’s lead to preserve privilege, work with the business sponsor to establish key business contacts, discuss audit rights and processes with the third party, you should prepare initial document request lists for financial information queries, take the time to review findings from previous audits and resolutions and also review details of opened and closed internal investigations, if there are any Code of Conduct questionnaires available take care to review and finally be cognizant of any related Department of Justice (DOJ) and Securities and Exchange Commission (SEC) enforcement actions.

The next step is to determine the entry points of foreign government involvement; (1) direct and (2) indirect. The direct category includes: customs and duties, corporate taxes and penalties, social security or national insurance issues for employees, obtaining in-country visas and work permits, public official gifts and entertainment, training of and attendant travel for employees of government owned entities, procurement of business licenses and permits to perform work and, finally, areas around police escort and security. In the indirect category, some of the key areas to review are: customs agents and freight forwarders, visa processors, commercial sales agents, including distributors and, finally, those who might be consultants or other channel partners.

Document review and selection is important for this process, you should ask for as much electronic information as possible well in advance of your audit. It is much easier to get database records for internal audits than audits of third parties. Try and obtain records in database or excel format and not simply in .pdf. Request the following categories of documents; trial balance, chart of accounts, journal entry line items, financial and compliance policies, prior audited financial statements, bank records and statements, a complete list of agents or intermediaries and revenue by country and customer.

Your lead interviewer needs to be culturally sensitive, patient and must negotiate a good working relationship with the forensic auditors on your audit team, who will be reviewing the documents from their professional perspective. Regarding potential interviewees, focus on those who interact with government entities, foreign government officials or third parties, including those personnel involved with:

  • Business Leadership
  • Sales/Marketing/Business Development
  • Operations
  • Logistics
  • Corporate Functions: Human Resources, Finance, Health, Safety and Environmental, Real Estate and Legal.

For the interview topics, there are several lines of inquiry. Remember this is an audit interview, not an investigative interview. You should not play ‘got-cha’ in this format. You should avail yourself of the opportunity to engage in training while you are interviewing people. The topics to interview on included:

  • General policies and procedures;
  • Books and records pertaining to FCPA risks;
  • Test knowledge of FCPA and UK Bribery Act including facilitating payments and their understanding of your company’s prohibitions;
  • Regulatory challenges they may face;
  • Any payments of taxes, fees or fines;
  • Government interactions they have on your behalf; and
  • Other compliance areas you may be concerned about or that would impact your company, including: trade, anti-boycott, anti-money laundering, anti-trust.

In the review of the General Ledger (GL) accounts, you should consider commission payments to agents and representatives, any facilitating payments made, all payments around travel, meals and entertainment, payments made around training, gifts, charitable contributions, political donations and sales and promotion expenses. If there were payments made for customs or freight forwarders and other processing agents, permits, licenses, taxes and other regulatory expenses should be reviewed. Additionally any entries pertaining to community contributions and social responsibility payments should be assessed and, finally, a review of any security payments, extortion payments, payments to legal consultants or tax advisors or fines and penalties should be considered.

Regarding bank accounts and cash disbursement controls, you should review the following:

  • Review controls around bank accounts and cash disbursements;
  • Identify and review authorized signers, approval levels, and bank reconciliations;
  • Ensure all bank accounts are included in the General Ledger;
  • Identify and review certain bank and cash disbursement transactions;
  • Identify offshore bank accounts.

In the area of cash funds review the following:

  • Review controls around petty cash funds;
  • Ascertain processes in place regarding disbursement and reconciliation of cash funds;
  • Identify and review payments to government officials, agents, or any unusual or suspicious activities; and
  • Identify and review certain bank transactions and test for any improper payments.

For gifts, travel and entertainment, you should explore payments made through employee-reimbursed expenses, scrutinize for any suspicious expenses submitted, expenses lacking adequate documentation, incorrect posting; and identify and review accounts associated with gifts, meals, entertainment, travel, or promotion. In the area of payroll, consider the risks around the use of ghost employees, hiring of relatives of government employees, and the use of bonus payments and be sure to request a payroll listing and review for any such persons.

You should review GL accounts and expenses for related items. In taking a look at payments under local law, you should obtain list of payments to the government required by local laws and identify and review payments to government authorities or employees, customs authorities or agents, income taxes authorities or license requirements. For payments made to third parties, you should review commission and expense payments for compliance with company policy and also trace payments to the third party’s bank account.

Three Key Takeaways

  1. Be prepared.
  2. It is not an investigative interview but an audit interview.
  3. Listen, listen, listen.

 

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.

 

The building blocks of any Foreign Corrupt Practices Act (FCPA) anti-corruption compliance program lay the foundations for a best practices compliance program. For instance in the lifecycle management of third parties, most compliance practitioners understand the need for a business justification, questionnaire, due diligence, evaluation and compliance terms and conditions in contracts. However, as many companies mature in their compliance programs, the issue of third party management becomes more important. It is also the one where the rubber meets the road of operationalizing compliance.

In an issue of Supply Chain Management Review in an article by Mark Trowbridge, entitled “Put it in Writing: Sharpening Contracts Management to Reduce Risk and Boost Supply Chain Performance”, provided useful insights into the management of the third party relationship. While the focus of the article was having a strategic approach to contracts management, the author’s “five ways to start professionalizing your approach to outsourcing contracts” were an excellent manner to consider steps in the management of third party relationships.

The key is to have a strategic approach to how you structure and manage your third party relationships. This may mean more closely partnering with your third parties to help manage the anti-corruption compliance risk. It would certainly lead towards enabling your company to “control risk while optimizing the performance” of your third parties. To achieve these goals, I have revised Trowbridge’s prescriptions from suppliers to third parties.

Consolidate Third Parties but Retain Redundancy

It is incumbent that consolidation in your third party relationships to a smaller number to “yield better cost leverage.” From the compliance perspective, it also should make the entire third party lifecycle easier to manage, particularly steps 1-4. However, a company must not “over-consolidate” by going down to a single source supplier. You should build a diversified supplier base, with a through “dual-sourcing”. From the compliance perspective, you may want to have a primary and secondary third party that you work with in a service line or geographic area to retain this redundancy.

Keep Tabs on Subcontracted Work

This is one area that requires an appropriate level of management. If your direct contracting party has the right or will need to subcontract some work out, you need to have visibility into this from the compliance perspective. You will need to require and monitor that your direct third party relationship has your approved compliance terms and conditions in their contracts with their subcontractors. You will also need to test that proposition. In other words, you must require, trust and then verify.

When Disaster Strikes, Make Sure Your Company is Legally Protected

This is where your compliance terms and conditions will come into play. One of the things that I advocate is a full indemnity if your third party violates the FCPA and your company is dragged into an investigation because of the third party’s actions. Such an indemnity may not be worth too much but if you do not have one, there will be no chance to recoup any of your legal or investigative costs. Another important clause is that any FCPA violation is a material breach of contract. This means that you can legally, under the terms of the contract, terminate it immediately, with no requirement for notice and cure. Once again you may be somewhat constrained by local laws but if you do not have the clause, you will have to give written notice and an opportunity to cure. This notice and cure process may be too long to satisfy the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) during the pendency of a FCPA investigation. Finally, you need a clause that requires your third party to cooperate in any FCPA investigation. This means cooperation with you and your designated investigation team but it may also mean cooperation with US governmental authorities as well.

You also need the ability to move between third parties if the need arises. This is the redundancy issue raised above. You do not want to be stuck with no approved freight forwarders or other transporters in a certain geographic area. If a compliance related matter occurs, you may well need certain contractual rights to move your work and to require your prime third party to cooperate with the transition to your secondary third party.

Keep Track of Your Third Parties’ Financial Stability

This is one area that is not usually discussed in the compliance arena around third parties but it seems almost self-evident. You can certainly imagine the disruption that could occur if your prime third party supplier in a country or region went bankrupt; but in the compliance realm there is another untoward Red Flag that is raised in such circumstances. Those third parties under financial pressure may be more easily persuaded to engage in bribery and corruption than third parties that stand on a more solid financial footing. You can do this by a simple requirement that your third party provide annual audited financial statements. For a worldwide logistics company, this should be something easily accomplished.

You should take advantage of automated financial tracking tools to keep track of material changes in a third parties’ financial stability. You should also use your in-house relationship manager to regularly visit key third party relationships so an on-the-ground assessment can be a part of an ongoing conversation between your company and your third parties.

Formalize Incentives for Third Party Performance

One of the key elements for any third party contract under the FCPA or UK Bribery Act is the compensation issue. If the commission rate is too high, it could create a very large pool of money that could be used to pay bribes. It is mandatory that your company link any commission or payment to the performance of the third party. If you have a long-term stable relationship with a third party, you can tie compensation into long-term performance, specifically including long-term compliance performance. This requires the third party to put skin into the compliance game so that they have a vested, financial interest in getting things done in compliance with the FCPA or other anti-corruption compliance regimes.

By linking contractual compensation to performance, there should be an increase in third party performance. This is especially valuable when agreed upon key performance indicator (KPI) metrics can be accurately tracked. This would seem to be low hanging fruit for the compliance practitioner. If you cannot come up with some type of metric from the compliance perspective, you can work with your business relationship team to develop such compliance KPIs.

You should rank third parties based upon a variety of factors including performance, length of relationship, benchmarking metrics and KPIs. This is a way for the compliance practitioner to have an ongoing risk ranking for third parties that can work as a preventative and even proscription prong of a compliance program and allow the delivery of compliance resources to those third parties that might need or even warrant them. 

Three Key Takeaways

  1. Have a strategic approach to third party risk management.
  2. Rank third parties based upon a variety of factors including compliance and business performance, length of relationship, benchmarking metrics and KPIs.
  3. Keep track of the financial stability of your third parties.

 

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.

In this episode I am joined by Ruth Steinholtz of AretéWork, Jonathan Armstrong of Cordery Compliance and Kristy Grant-Hart of Spark Compliance Consulting and author of How To Be a Wildly Effective Compliance Officer for a roundtable discussion of the recently concluded SCCE European Compliance and Ethics Institute. We discuss some of the highlights, the changes this group of compliance practitioners has seen and where compliance may be headed in 2017 and beyond.

 

 

In this episode Compliance Week Editor in Chief Bill Coffin discusses the upcoming Compliance Week 2017 Conference May 22-24, 2017 in Washington DC. Coffin highlights the key note speakers and some of the other key topics for the event. He discusses how Compliance Week is an entire experience for attendees, exhibitors, speakers and guests. Best of all, listeners to this podcast can receive a discount to this year’s event. Go to registration and enter discount code CW17TOMFOX.

In this episode, Matt Kelly pinch hits for a Walt Disney World-vacationing Jay Rosen. Matt and I have a wide-ranging discussion on some of the week’s top FCPA and compliance related stories. We discuss:

  1. Shearman & Sterling issues its Report to the Wells Fargo Board on the fraudulent account scandal. For Tom’s three-part series see Part I, Part II and Part III.
  2. United Airlines is at it again. Click here for Matt’s article on Radical Compliance. Click here for Tom’s article in Compliance Week.
  3. Interesting judicial decision on restitution from Judge Posner. See article in the Grand Jury Target blog.
  4. Barclay’s CEO penalized for trying to unmask internal and anonymous whistleblower by using corporate security and US law enforcement. See Tom’s article in Compliance Week.
  5. Matt reports on Oracle’s Modern Finance Experience conference. Click here for Matt’s blog post on Radical Compliance.