FCPAméricas Blog

FCPA Contract Provisions for Latin American Third Parties: Avoiding pitfalls of audit rights clauses

Author: Carlos Ayres

FCPAAuditFCPA enforcement actions in the recent past, as well as the FCPA Guidance, highlight the importance of including audit rights, and exercising those rights, in written contracts with third-party contractors. This post provides suggestions for avoiding pitfalls when establishing such rights in Latin America. A second post in this series highlights examples of information that companies may want their third parties to actively report as soon as they become aware of it in order to help identify corrupt behavior. The third post discusses other provisions that counsel should consider for third party contracts in Latin America to control FCPA exposure in the region.

In Latin America, enforceability of audit clauses is often extremely difficult, time-consuming, and costly. The main reason is that usually the audit rights clauses of Latin American subsidiaries consist mainly of translated versions of the clauses used by their U.S. headquarters. Such clauses often disregard best practices in contract drafting in the legal systems in which the subsidiaries operate. Subsidiaries should take care in drafting audit clauses since courts in the region and arbitrators will often be unfamiliar with them. The enforceability of such clauses is even more problematic in the context of internal investigations in the region and can lead to disputes.

As a preliminary matter, the audit clauses need to be detailed. Other practical steps will help companies maximize the efficacy of their audit clauses in Latin America. Audit clauses should expressly provide:

All types of information and documentation to be provided: Specific types of information and documentation might be important in the context of an internal investigation or when assessing the integrity of the third-party’s business practices. This could include access to expense reports of the third-party employees, subpoenas that the third-party might receive from enforcement agencies, and emails related to a project. Without detailed audit rights, a company might end up having access to only tax or accounting books. This would likely provide little, if any, useful information in a compliance audit. In addition to a clear and detailed list of all types of information to be provided, it is advisable to leave broad language that guarantees access to other information and documents kept in different formats. Finally, the audit clause should expressly provide the right to interview the third party’s employees.

Definition of scope and selection of auditors: When an audit right clause is not properly drafted, it is common to see disputes arise related to the definition of the scope of the audit and selection of auditors. Contractual clauses should therefore establish that companies and their auditors will have the right to decide, based on their own criteria, the appropriate scope and work plan to verify third-party compliance with applicable laws and contractual obligations. Audit clauses should also provide that companies exercising such clauses will have the right, based on their own criteria, to select the auditors (attorneys and/or forensic accountants) that will conduct the audit.

Delivery format of documentation and record keeping: Oftentimes companies exercising audit rights in Latin America come across situations where third parties provide them with documentation that is not in its original format and that is difficult and time-consuming to process. For example, there have been cases in which companies provided financial data that could be easily provided in electronic format in a printed format that did not allow for Optical Character Recognition, causing delays in the process. Contractual clauses should require parties to provide documents in original format and in an organized manner. In some situations, a third party will claim it does not have certain documents because they have been destroyed. To address this, a good practice is to include contractual provisions that require, at all times during the term of the agreement and for an additional term of five years after the agreement is complete or terminated, the third party to keep accurate and complete books and records in connection with the activities under the agreement. The requirements can specifically include the documents mentioned above as well.

Perhaps more important than having state of the art audit clauses is a company’s willingness to enforce them. Last year, Assistant Director of the SEC’s FCPA Unit Tracy Price publicly stated that enforcement agencies are looking at how companies choose to exercise such rights, especially with respect to the third parties that represent highest risks. To ensure that such clauses are effective, it is helpful to obtain a review by local counsel specialized in anti-corruption and compliance.

The opinions expressed in this post are those of the author in his or her individual capacity, and do not necessarily represent the views of anyone else, including the entities with which the author is affiliated, the author`s employers, other contributors, FCPAméricas, or its advertisers. The information in the FCPAméricas blog is intended for public discussion and educational purposes only. It is not intended to provide legal advice to its readers and does not create an attorney-client relationship. It does not seek to describe or convey the quality of legal services. FCPAméricas encourages readers to seek qualified legal counsel regarding anti-corruption laws or any other legal issue. FCPAméricas gives permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author and to FCPAméricas LLC.

© 2013 FCPAméricas, LLC

Carlos Henrique da Silva Ayres

Post authored by Carlos Henrique da Silva Ayres, FCPAméricas Contributor

Categories: Anti-Corruption Compliance, Audits, English, FCPA, Third Parties

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