FCPAméricas Blog
Managing Pushback to Third Party FCPA Due Diligence in Latin America
12.04.2013
Classic military strategist Helmuth von Moltke the Elder said, “No plan survives contact with the enemy.” In addition to its application on the battlefield, this lesson is good to keep in mind during anti-corruption due diligence as well.
Outside counsel recommend that companies conduct due diligence on third parties (as discussed by FCPAméricas here). But what if the third party pushes back? What if a contractor declines to provide financial statements or curriculum vitae for its top sales personnel? What if a customs broker refuses to include anti-corruption compliance language or audit rights in a contract? Or if a distributor is unwilling to fill out a questionnaire?
FCPAméricas has previously discussed how to manage local resistance in M&A due diligence. In this post, we suggest strategies for handling pushback to third party due diligence.
Teach. Companies can demonstrate to third parties why the due diligence process is necessary. They can explain that compliance requirements apply to all business relationships. They can use prior FCPA enforcement actions to show that due diligence is a basic requirement in international business. They can rely on multilingual resources like FCPAméricas to help teach third parties about compliance expectations. When doing this, it helps to compare anti-corruption compliance mechanisms to other types of compliance requirements that might be more familiar to the third party – like the “know your customer” requirements applied by banks under international anti-money laundering regimes.
Listen. The third party might have a very good reason for refusing to accept due diligence requests. Perhaps the owners have a strategic business reason, such as a contemplated acquisition, for wanting to avoid revealing confidential business information. Perhaps doing so will put their own security at risk (FCPAméricas has discussed security risks in places like Colombia and Mexico). To understand the underpinnings of a situation, a company might need to do some digging. If, on the other hand, there is no good reason for rejecting due diligence requests, this fact could be considered a corruption red flag.
Be flexible / negotiate. Effective due diligence often requires a degree of flexibility. If there is a legitimate reason for the pushback, there might be other ways of getting to the information needed. For example, companies will sometimes request the financial statements of a third party as part of their normal due diligence processes. By reviewing them, companies are able to confirm that the third party is a bona fide entity and not a shell company, as discussed here. The existence of financial statements also shows that the third party has some controls in place – its books are probably being reviewing and approved by external auditors. In the event that a third party does not want to provide these documents, there might be other ways of accomplishing the same goals. Perhaps the company can request a reference from the third party’s bank or from one of its clients.
Stay focused on risk. FCPA enforcement officials make it very clear that third party due diligence should be risk based. This means that not all third parties require the same level of review. FCPA contractual provisions might not be necessary for the company that cleans the office. Even if a service provider interacts with government officials, the entity might not present much risk if its compensation is minimal. On the other hand, if the third party is receiving significant funds, commonly interacts with officials on the company’s behalf, operates in high-risk places, and/or operates in industries and sectors known for corruption, then thorough due diligence and monitoring is much more important.
Where foreign bribery risk is significant, companies should not be afraid to walk away from an arrangement. It might mean that the company will have to use a higher cost provider instead. But, in the end, the additional costs will likely be minimal compared to the costs associated with an FCPA enforcement action, as described here.
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
Post authored by Matteson Ellis, FCPAméricas Founder & Editor
Comments
December 4th, 2013 at 10:30 pm
Nice. The introductory quote is so much more dignified, but no more eloquent, than Mike Tyson’s “Everybody has a plan until they get punched in the face.”