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FCPA Contract Provisions for Latin American Third Parties: The obligation to actively report certain information

FCPAreporting [1]Recent FCPA enforcement actions have required companies to include compliance clauses in agreements entered into with third parties. This includes, among other things, representations related to compliance with anti-corruption laws, rights to conduct audits, and rights to terminate the agreement for any breach of anti-corruption laws and representations.

A previous post [2] discussed the difficulties faced by companies trying to enforce their audit rights in Latin America and practical steps to mitigate these risks. This post 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 in this series discusses other provisions that counsel should consider for third party contracts in Latin America to control FCPA exposure in the region.

Obligation to actively report motions or appeals related to procurement processes alleging corruption, bid rigging, or limited competition. Oftentimes companies engage local sales representatives, resellers, and distributors to commercialize their products and services to private and public entities. In sales to public entities, it is important to observe that, as a general proposition, in Latin America the governments must contract or purchase by means of public bidding, which requires fair and equal conditions to all participants. In these procurement processes, the interaction with the public entity is usually done by a third-party, not the company, who presents the bids and the necessary documentation directly. Frequently, companies will only know that an opportunity exists and, afterwards, whether or not the business partner won it.

During such procurement processes, companies are usually entitled to ask questions about specifications, challenge the qualifications of competitors, and take other actions by means of filing formal motions and appeals. In Brazil, these activities are common in public biddings.

In many cases, competitors may indicate that the specifications are tailored to the specifications of one manufacturer or bidder or that there are other indications of corrupt or collusive practices. Oftentimes companies themselves never become aware of such allegations. They usually do not follow the process. Depending on the size and frequency of sales to government entities, it might be impractical to do so. In fact, some companies only learn about such allegations later on when authorities bring enforcement actions against the third parties. In some cases, authorities have brought actions against the companies themselves.

To avoid such issues, companies use contract clauses obligating third parties to actively report in a prompt manner any allegations made in a procurement process that contain explicit or implicit references to corruption, bid rigging or limited competition related to the third-party or the products/services that they are offering. This allows companies to identify red flags of corrupt behavior and address the issues accordingly.

Obligation to actively report investigations and enforcement actions. Accessing information about investigations and enforcement actions related to companies and individuals in Latin America is often a difficult and time-consuming task. Many countries do not have centralized public databases where information about past and ongoing cases can be easily checked. In many situations, only the defendants may know about the existence of a case against them. Thus, companies may not become aware, for example, that an officer of its distributor in Venezuela has been charged for involvement with corrupt practices until it hits the headlines.

Given this risk, many companies operating in the region have started including clauses in their contracts that obligate third parties to promptly report any investigation or enforcement actions that contains allegation of fraud or corruption, and related matters. This extends to actions related to the third-party, its shareholders, officers and certain employees. It should be noted that, in general, criminal liability in Latin America is personal and, in many cases, enforcement actions will be taken only against individuals. Information just about the legal entity may not be enough.

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