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FCPA Violations By Third Parties: What To Watch For

The Foreign Corrupt Practices Act of 1977 ("FCPA") was created to make payments to foreign government officials, in order to obtain or retain business, unlawful. More often than not, the third parties, including agents, consultants and distributors, that assist with these transactions are pursued by the DOJ and SEC for their involvement in FCPA violations.

"In the FCPA resource guide, the DOJ and the SEC observed that third parties, are commonly used to conceal bribery in international business transactions. The resource guide states that risk-based due diligence is especially important with third parties and will be considered by the DOJ and SEC in assessing the effectiveness of a company's compliance program." The guide notes that the type of transaction, the amount exchanged, and industry effected will cause due diligence to be interpreted differently, but that the principles will always be enforced.

To avoid FCPA violations, companies must investigate the "qualifications and associations of their third-party partners, including their business reputations and relationships with foreign officials" according to the FCPA resource guide. The guide emphasizes that knowing one's business partner is essential to prove even the most basic forms of due diligence.

The guide also implores companies to evaluate and understand the business reason for agreeing to work with the third party in the transaction. This requires that the companies "ensure the contract specifically describes the services to be performed, consider the payment terms in light of industry norms, confirm the third party is actually performing the work, and confirm that the compensation is commensurate with the work." If it is difficult for a company to answer or confirm these basic questions, they are already at a serious risk of violating the FCPA.

The final guiding principle of the resource guide encourages companies engaging in these transactions to consistently reevaluate their relationships with the third parties and require annual compliance reports or audits. This helps to ensure that the company is actively trying to avoid any FCPA violations and exercising due diligence.

Defense companies have become extremely susceptible to FCPA violations because of the increasing need to find business outside of the U.S. that will make up for the reduced government spending on defense. When engaging with any high-risk countries, defense companies have had to be extremely diligent about the pursuit of the information suggested in the resource guide.

Failure to adhere to the guiding principles set forth by the DOJ and SEC in their resource guide can easily set up a company using a third-party contractor. In order to prove due diligence and compliance to the FCPA, a clearly defined relationship to any third party involved in international transactions is a must.

The legal team at SFMS has significant experience litigating securities matters. If you have any questions regarding this subject or this posting, please contact Alec Berin (aberin@sfmslaw.com) or Chiharu Sekino (csekino@sfmslaw.com). We can also be reached toll-free at (866) 540-5505.

Shepherd, Finkelman, Miller & Shah, LLP is a law firm with offices in California, Connecticut, Florida, New Jersey, New York, Pennsylvania and Wisconsin. SFMS is an active member of Integrated Advisory Group (www.iaginternational.org), which provides us with the ability to provide our clients with access to excellent legal and accounting resources throughout the globe. For more information about our firm, please visit us at www.sfmslaw.com.

Sources:

Act: https://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act

Law 360: http://www.law360.com/articles/792772/fcpa-violations-by-3rd-parties-what-to-watch-for

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