How much do you know about your overseas and cross-border business “partners?”
Explore this issueOctober/November 2012
Due diligence and internal controls are more critical in light of increased regulatory enforcement of anti-corruption laws here and abroad. This is especially true given the global reach of the food and beverage industry. While you might not invite third-party partners over for dinner, you and your organization will benefit greatly from knowing who these business are and how they operate.
According to the USDA, the value of U.S. food imports has more than doubled since 1999. With this expansion comes risk, particularly in new markets and developing countries. Food safety and an uninterrupted supply chain are the greatest concern, but the risks of not complying with anti-corruption laws are increasing, and the associated costs are high. Without a defensible anti-corruption position, your company is vulnerable.
The Foreign Corrupt Practices Act, the U.K. Bribery Act, and other anti-corruption statutes and local laws are affecting food importers and companies doing business abroad, as regulators hold companies liable for the actions of third parties.
Corruption prosecution, which disrupts business operations, erodes brands, and damages reputations, is a long and challenging process for any company. Corporations can be fined up to $2 million, or twice the gain on a contract, for a single FCPA violation.
Individuals can also face significant fines, imprisonment, or both. U.S. enforcement agencies assessed approximately $1.7 billion dollars in FCPA fines in 2010.
The penalties are particularly steep for organizations and individuals convicted of what the U.S. Justice Department calls “willful blindness”—not doing what they should have and ignoring fraud that has infiltrated a global supply chain.
Under FCPA, companies and individuals, including officers, directors, shareholders, employees, or agents of a U.S. company, may carry liability for the actions of agents, consultants, and distributors. In addition, they’re liable for subsidiary actions.
So what are third parties really doing on your behalf? Are you willing to bet your organization’s reputation and your career on it?
Anti-Corruption Laws and Statutes
Bribery among third-party market participants is widespread and takes many forms. Cash, product, and grease payments are not uncommon. We see this from a wave of third parties who are retained for their knowledge of local governments, transportation entities, and custom officials. These added touch points increase the risk of corruption, potentially exposing U.S. firms to unexpected liability.
Foreign Corrupt Practices Act
The United States Foreign Corrupt Practices Act was enacted more than 30 years ago, but the Justice Department’s FCPA team recently and very publicly stepped up its criminal enforcement and prosecution of violators. Companies whose stock is traded on a U.S. exchange may also expect a visit from the Securities and Exchange Commission if under investigation.
FCPA prohibits corrupt or improper payments to foreign officials to obtain or retain business. A corrupt payment or bribe could be cash or anything of value, such as gifts, entertainment, travel, or loans. Any interaction with foreign officials could present corruption risks. Though this becomes clearer if the action is found to have “corrupt intent” to influence the recipient, a company might be violating the FCPA simply by paying for a round of golf and dinner.
FCPA also requires U.S. registrants to keep books and records that accurately reflect business transactions and to maintain internal controls.
You must document the basis of expenditures. If there is no documented explanation, the assumption will be that the payments were made for corrupt purposes.
Here’s a common scenario: A company is establishing a facility to process raw materials for shipment to the U.S. The land is currently zoned for agricultural use, so setting up a processing plant requires converting land to another use. It’s not unusual for third-party agents to exchange cash bribes to facilitate rezoning. Agents may improperly record expenses to generate cash that is used to pay a “zoning consultant” who will assist in transferring the land from agricultural to food processing facility status. The duties of the zoning consultant are vague, including any and all activity to ensure the land is rezoned. In conducting due diligence for clients, we’ve seen this transpire even within long-standing agent relationships, to the great surprise of the companies involved. You may not have visibility into this corrupt activity from your corporate office, but to U.S. regulators and overseas prosecutors, that’s no excuse.