5 Questions Companies Must Ask During FCPA Due Diligence

Alexandra Wrage

Corporate Counsel

01-31-2013

It’s no secret that local agents and intermediaries are essential for most companies that want to break into foreign markets. They are invaluable in navigating bureaucratic and logistical mazes, understanding regional customs, and securing introductions to important decision-makers. These agents are not only able to translate the local language, but also the local business dialect, which can be starkly different from that with which the company is familiar. These ambassadors of commercial affairs also pose corruption risks though, which are widely reported in the compliance community.

Whether vetting third parties themselves or using an external vendor, companies seeking to protect themselves from liability under the U.S. Foreign Corrupt Practices Act (FCPA) should ensure that they get answers to five basic questions when conducting routine due diligence:

1. Who are the true beneficial owners of the company?

The goal here is to look past the corporate structure to determine who the true stakeholders of the foreign company are and ensure that those people are not government officials. It won’t matter if the person to whom you thought you were paying a commission is a private citizen if it turns out later that the company itself is actually owned by the governor of the province in which you are doing business.

2. Is there current or past wrongdoing?

Making sure that the company is responsible, reputable, and trustworthy means obtaining information about its current status on any of the international watch lists, as well as past legal or regulatory wrongdoing or debarment by the United Nations, international development banks, the European Community, etc. Many companies overlook the need to search not only entity names through the denied party lists, but also the names of owners. It’s all too easy to search the entity name from the “on-boarding” questionnaire or the agreement itself and miss the possibility that the majority owner is on one of these lists.

3. Do the owners and key employees understand the laws that apply to them?

Just because the company is neither U.S.-based nor listed on the New York Stock Exchange doesn’t mean that the FCPA or other anticorruption law won’t apply. Every country in the world has a domestic law making it illegal to bribe a public official. As proof of the agent’s commitment to, and not merely acquiescence with, antibribery policies, the agent should be required to make appropriate certifications, have or agree to adopt a code of conduct, and ensure that it will incorporate these policies in its own interactions with other third parties.

4. Where is the company headquartered, and are its corporate formalities in order?

Figuring out the company’s principal place of business and incorporation information can prove useful in understanding whether the company is operating legally or as a fraudulent shell organization. This information can also help to determine whether the company is located in a sanctioned country, or if it has ever been prosecuted or debarred for illegal conduct in the past. In an effort to circumvent sanctions, we have seen more than one company represent that an informal branch office in a non-sanctioned state was in fact the headquarters -- and companies operate under these conditions at their peril. It is not sufficient to ask an agent to complete a due diligence questionnaire and then assume that the address provided is correct. Proof of address and proof of business registration should be required.

5. Are there ties between the agent and government customers?

Agents and intermediaries are often sought out precisely because of their ties to government officials. But there’s a distinction to be made between a warm but arms-length business relationship and having a close family member on the other side of a deal. In between, there may be closer calls, such as when the agent previously worked in government or is childhood friends with the government official. Either way, you’ll want to know of any conflicts of interest before you reach the negotiating table.

These questions should be asked during an initial due diligence review to uncover any warning signs that might lead to liability or reputational damage for the company down the road. Upon investigation, some companies may be satisfied with the reputation of the candidate and choose to proceed; others may want to probe further or look for another candidate altogether. The key for companies is to get comfortable asking questions first. Finding out quickly and efficiently this all-important information about an agent before entering into an agreement with them is always the best way to prevent headaches and remorse later on. Any agent that resists a reasonable, fair, and businesslike approach to due diligence is raising a red flag that wasn’t there at the outset.

Alexandra Wrage is the president of TRACE, an antibribery compliance organization offering practical tools and services to multinational companies, including due diligence, training, and industry-specific benchmarking.