The Master List of Third Party Corruption Red Flags

^[1]Under the FCPA, companies and individuals can be liable for the bribes that their agents, consultants, sales representatives, distributors, lawyers, accountants, brokers, and other third party intermediaries make to foreign officials on their behalf. Specifically, the FCPA applies to “indirect” payments as well as “direct” ones.

To mitigate this risk, companies are expected to conduct integrity due diligence on their third parties and monitor their activities, described by FCPAméricas in these posts ^[2]. Companies are also expected to equip their work forces to recognize the red flags of corruption related to the third parties they use, described here ^[3]. This is because liability for a third party’s actions can be based on actual knowledge or constructive knowledge. While the existence of a red flag does not automatically preclude the use of a specific third party, it does warrant a closer review of the entity and perhaps the application of additional controls to the relationship, thereby safeguarding against a potential FCPA violation.

To help its audience prepare employees to recognize red flags, FCPAméricas has prepared this comprehensive list of common red flags of corruption.

Reputational Risk

The transaction or the third party is in a country known for widespread corruption, as measured by the Transparency International Corruption Perceptions Index or other similar indices.
The third party has a history of improper payment practices, such as prior or ongoing formal or informal investigations by law enforcement authorities or prior convictions.
The third party has been subject to criminal enforcement actions or civil actions for acts suggesting illegal, improper or unethical conduct.
The third party has a poor business reputation.
Allegations that the third party has made or has a propensity to make prohibited payments or facilitation payments to officials.
Allegations related to integrity, such as a reputation for illegal, improper, or unethical conduct.
The third party does not have in place an adequate compliance program or code of conduct or refuses to adopt one.
Other companies have terminated the third party for improper conduct.
Information provided about the third party or its services of principals is not verifiable by data, only anecdotally.

Government Relationships

The third party has a family relationship with a foreign official or government agency.
The third party has a business relationship or association with a foreign official or government agency.
The third party previously worked in the government at a high level, or in an agency relevant to the work he/she will be performing.
The third party is a company with an owner, major shareholder or executive manager who is an official.
There is rumor that the third party has an undisclosed beneficial owner.
A government official requests, urges, insists, or demands that a particular party, company, or individual be selected or engaged, particularly if the official has discretionary authority over the business at issue.
The third party makes large or frequent political contributions.
The third party conducts private meetings with government officials.
The third party provides lavish gifts or hospitality to government officials.
The third party insists on dealing with government officials without the participation of the company.

Insufficient Capabilities

The third party is in a different line of business than that for which it has been engaged.
The third party lacks experience or a “track record” with the product, service, field, or industry.
The third party does not have offices or a staff, or lacks adequate facilities or staff, to perform the work.
The third party has an unorthodox corporate structure.
The address of the third party’s business is a mail drop location, virtual office, or small private office that could not hold a business the size that is claimed.
The third party is not expected to perform substantial work.
The third party has not been in business for very long or was only recently incorporated.
The third party has poor financial statements or credit.
The third party’s plan for performing the work is vague and/or suggests a reliance on contacts or relationships.

Type and Method of Compensation

The third party requests an unusual advance payment.
The fee, commission, or volume discount provided to the third party is unusually high compared to the market rate.
The compensation arrangement is based on a success fee or bonus.
The third party offers to submit or submits inflated, inaccurate, or suspicious invoices.
The third party requests an invoice to reflect a higher amount than the actual price of goods provided.
The third party’s invoice vaguely describes the services provided.
The third party requests cash, cash equivalent, or bearer instrument payments.
The third party requests payment in a jurisdiction outside its home country that has no relationship to the transaction or the entities involved in the transaction – especially if the country is an offshore financial center.
The third party requests that payment be made to another third party or intermediary.
The third party proposes the use of shell companies.
The third party requests that payments be made to two or more accounts.
The third party shares compensation with others whose identities are not disclosed.
The third party requests an after-award services contract that it does not have the capacity to perform.
The third party requests that a donation be made to a charity.
The third party refuses to properly document expenses.
The third party pressures the company to make the payments urgently or ahead of schedule.
The third party requests a large up-front payment.
The third party requests payment arrangements that raise local law issues, such as payment in another country’s currency.

Unusual Circumstances

The third party refuses to agree to comply with the FCPA, UKBA, equivalent applicable anti-corruption legislation, anti-money laundering laws, or other similar laws and regulations.
The third party refuses to warrant past compliance with the FCPA, UKBA, equivalent applicable anti-corruption legislation, anti-money laundering laws, or other similar laws and regulations.
The third party refuses to execute a written contract, or requests to perform services without a written contract where one is sought.
The third party insists that its identity remain confidential or that the relationship remain secret.
The third party refuses to divulge the identity of its beneficial owners, directors, officers, or other principals.
The third party refuses to answer due diligence questions.
The third party refuses to allow audit clauses in contracts.
A suggestion by the third party that anti-corruption compliance policies need not be followed.
A suggestion by the third party that otherwise illegal conduct is acceptable because it is the norm or customs in a particular country.
Suspicious statements by the third party such as needing payments to “take care of things” or “finalize the deal.”
The representation is illegal under local law.
The alleged performance of the third party is suspiciously higher than competitors or companies in related industries.
A third party guarantees or promises unusually high rates of return on the promotional services provided.
The third party requests approval of a significantly excessive budget or unusual expenditures.

If you have other red flags to add to this list, please include them in the Comment section of this post or e-mail them in.

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.