FCPAméricas Blog

Third Party Red Flags and Latin America

Author: Matteson Ellis

Looking back at FCPA enforcement actions in 2011 that involved Latin America, all but one included risk created “indirectly” by third parties. And that one, Tyson Foods, involved payments to spouses of Mexican officials, a potentially odd twist on the concept of “third party risk.” The kind of third parties used in these cases included customs agents, consultants, sales agents, and deal brokers.

It is clear that actions by third party intermediaries remain one of the greatest sources of corruption risk for U.S. companies operating in the region. A company seeking to maximize its compliance spending would be well-advised to focus on third party risk.

The DOJ says that when third party “red flags” are present, companies should “exercise due diligence” and “all necessary precautions.” Government authorities have provided guidance on what constitutes a red flag. The DOJ provides examples of third party red flags, like a history of corruption in the country, unusually high commissions, apparent lack of qualifications, or a refusal by the third party to provide a certification that it will not violate the FCPA or other anti-bribery laws. The UK’s Serious Fraud Office recently offered its own list. Tom Fox and Howard Sklar note in Episode 24 (minute 37) of This Week in FCPA that the SFO and DOJ lists contain much crossover. For example, both include abnormal cash payments and payments made through third party countries or other unusual payment patters. The SFO adds other flags like “Company procedures or guidelines not being following,” and “Invoices being agreed in excess of contract without reasonable cause.” These are all issues that should trigger enhanced compliance oversight.

To help companies understand how enforcement applies these red flags, FCPAméricas provides a few examples of cases below. Though these cases do not deal with Latin America, they are relevant in understanding the government’s approach.

In York International Corp., the company agreed to pay approximately $22 million in combined fines and penalties to settle DOJ and SEC actions relating to improper payments made by various subsidiaries, through agents and consultants, to the Iraqi government under the U.N. Oil-for-Food Program. The SEC alleged that York knew of endemic corruption problems in the Middle East and nonetheless appeared to take on faith, without adequate confirming steps, that the Vice President for the Middle East was exercising his duties to manage compliance and control issues. York also knew, or had the means to easily learn, that the Middle East and other regions did not follow consistent practices with regard to performing due diligence in connection with agents and consultants. Many of the “consultants” submitted fake invoices without performing bona fide services, and no diligence was done. Several agents and consultants had no written agreement with a York subsidiary, and others signed template agreements that did not specify the consultancy services thatthey purportedly were providing. Internal audits also highlighted problems with the company’s internal controls.

In InVision, Inc., the SEC alleged that InVision was aware of a high probability that its sales agents or distributors made or offered to make improper payments to foreign officials in China, the Philippines, and Thailand. The SEC further alleged that the company had been told by its agents about requests for payments to officials and that the agents would give gifts to government officials. InVision paid $1.1 million in disgorgement and penalties. The SEC also proceeded against the company’s Senior Vice President for Sales and Marketing for civil violations for “fail[ing] to devise and maintain a system of internal controls adequate to detect and prevent InVision’s violations of the FCPA,” even though the SEC was unable to show that the officer had actual knowledge that bribes were paid.

In El Paso Corporation, the SEC alleged that the company “knew or was reckless in not knowing” of illegal surcharges collected and passed to Iraqi government officials through third party intermediaries because the company had first-hand experience that the Iraqi Government was demanding the surcharges, company officials expressed such knowledge in recorded telephone conversations, the company was aware of articles in the trade press and national media discussing illegal Iraqi surcharge demands, and the company failed to conduct adequate due diligence. El Paso paid almost $8 million in civil penalties and disgorgement.

In Titan, the SEC alleged that the company paid over $3.5 million to an agent in Benin while ignoring the fact that the agent was a business advisor to the President of Benin. As a result, the SEC alleged that the company failed to establish adequate internal controls, including conducting meaningful due diligence to assure that the agent actually provided the services contracted. Titan settled the action by paying $28.5 million in disgorgement and penalties.

These cases make clear a company’s obligation to not overlook or ignore suspicious conduct by third parties. Senior management can expose the company (and themselves) to FCPA liability if they are aware of red flags and fail to make efforts to ensure that basic compliance controls are applied.

The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

© 2012 Matteson Ellis Law, PLLC

Matt Ellis

Post authored by Matt Ellis, FCPAméricas Founder & Editor

Categories: Anti-Corruption Compliance, Due Diligence, Enforcement, FCPA, Howard Sklar, Mexico, Risk Assessments, Third Parties, Tom Fox, UK Bribery Act

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