A Case Study of Third Party FCPA Due Diligence Study

 

There is a normal misconception on operation level of most companies that if a third party agency pays bribery to achieve a goal of the company that you own or manage (“YOUR COMPANY”), it is the third party’s problem as they are simply trying to maintain their own business. This is probably the reason why most FCPA cases are triggered by third party.

 

Below is to show a hypothetical case study in which how potential FCPA issue arising from suspicious third party action should be dealt with:

 

Case Study – Customs Broker

 

Situation: YOUR COMPANY clears its goods through customs in country X, which is known to have relatively high levels of corruption, through a local customs broker. The contract with the custom broker provides that the broker will not engage in bribery nor pay facilitation payments and the broker has certified its compliance with those provisions. YOUR COMPANY has used the broker for the last 3 years. A new local manager receives the broker’s monthly invoice, which provides a detailed description of the shipments cleared by the broker and the resulting charges and a lump sum charge for “miscellaneous services.” The local manager inquires around his colleagues to ask what the charge is. Nobody is entirely sure about what that is. The only information for sure is that YOUR COMPANY has always paid it which is normally considered a commission or tax payment. The practice is normally to let the broker get on with his job and not to ask too many questions – after all, the broker is the local expert and has confirmed in writing that no improper payments will be made. The local manager is not sure whether to approve the invoice or not – this is a critical sales period, and it is important that product comes into the country without delay.

 

Response: The local manager should certainly not approve an invoice for services that are unspecified. The manager could first check the broker’s contract to see if there is a logical explanation for the charge. The local manager should then arrange an introductory meeting with the broker. At the meeting the manager should confirm what the charge is for and probe further if the broker’s explanation is at all unsatisfactory. Even if the broker’s explanation is satisfactory, the broker should be asked to re-issue the invoice with sufficient detail to explain the charges. The local manager should also take the opportunity to reiterate YOUR COMPANY’s expectations and understand how, in practice, the broker manages the services it provides for YOUR COMPANY in a high corruption environment without making improper payments.

 

If the explanation is unsatisfactory the manager must not approve the invoice and consider the following legal actions:

 

  • Sending a written request to the central customs authorities asking if the fees requested are official fees and/ or required by law.

 

  • If the central customs authority confirms that these fees are not legally required or official fees, confirming to the broker that YOUR COMPANY do not pay such fees nor authorize any third parties to pay this kind of fee in relation to our business. YOUR COMPANY might then ask the customs clearing agent to share the central customs authority’s letter with the officials requesting the payments, as justification for not paying the requested fees.

 

  • Instructing the broker to always request that customs officials sign a pre-printed receipt specifying the date, the amount of the payment, the type of services rendered and the name of the official. The broker should inform the official that this receipt will be shared with YOUR COMPANY and could be shared with senior customs officials.

 

  • Instructing the broker to personally fill out the pre-printed receipt indicated above if the official refuses to do so, noting, in addition to the information specified above, the name of the official (it can normally be seen on the official’s identification badge).

 

  • Documenting the whole process and share with Legal so a determination can be made as to the appropriateness of continuing to make these payments.

 

Prevention: In addition to the initial due diligence and certification referred to above, the local manager should regularly remind his/her agents that YOUR COMPANY prohibits the making of any kind of facilitation payment or bribe, even where they are legal or normal in the country in question, and irrespective of any potential disruption to YOUR COMPANY’s business. This should happen via a specific training program as well as in contractual documentation and routine interactions. The local branch of YOUR COMPANY should also make sure our customs clearance system is designed in a way that minimizes the risk of such payments being requested and made. For example use regular customs clearing processes instead of bond clearing process if the latter requires a heavier involvement of customs officials for additional clearing services and overtime.

 

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Please note that this article is not contemplated to exhaustive or be relied upon as formal legal advice. Should you wish to know more about the details of this particular area of law, please send an email to j.cao@pricecao.comand we would be more than happy to hear from you.

 

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