Worried about your global partners? If implemented properly, investigative due diligence is unsurpassed as a low-cost, high-value tool in learning about a company's overseas connections—particularly in light of stepped-up enforcement of the Foreign Corrupt Practices Act

Directors & Boards, Wntr, 2008 by Scott Moritz, Maximilian Block

THE UNITED STATES government has dramatically stepped up enforcement of the Foreign Corrupt Practices Act (FCPA), the law that prohibits bribes and improper payments to foreign officials by U.S. companies and non-U.S. companies traded on U.S. stock exchanges. In a three-month stretch of 2007, the Department of Justice levied the two largest fines in FCPA history--a $44 million fine against a Texas-based oil services company that had made illegal payments to government officials in Kazakhstan, and a $26 million fine against a Houston gas drilling company that had made illegal payments to officials in Nigeria.

The stepped-up enforcement--and the unprecedented size of the fines--leaves no doubt as to the government's resolve to root out the problem of illegal payments by U.S. companies operating abroad. What may come as a surprise, however, is that U.S. businesses have access to a relatively inexpensive solution that can help mitigate exposure to FCPA liability--namely, investigative due diligence. Whether the violation is happening halfway around the world or just south of the border, whether it's being carried out by a high-level executive or a recently hired intermediary such as a broker or distributor, investigative due diligence presents a low-cost, effective means of heading off FCPA violations before they happen.

While speaking at a recent panel discussion on the subject of the FCPA, Mark Mendelsohn, who oversees FCPA prosecutions at the U.S. Department of Justice, was asked which factors come into play when weighing whether to prosecute a corporation for FCPA violations. He replied that he asks to see a report on the due diligence performed on the company's local partner.

Of particular interest, Mendelsohn continued, was how much the company knew about the ownership of the local partner; whether there was any nexus between the entity and the foreign public officials in question; if the company had a history of unethical business dealings; and if the company was actively engaged in commercial activities beyond assisting the U.S. company in securing government business or approval.

As varied as they are, all of Mendelsohn's questions point to a singular message that the Justice Department is putting before CEOs and chief compliance officers throughout the country: It is your responsibility to understand who you're doing business with overseas.

Questions needing answers

That message naturally gives rise to a number of questions for senior leadership of major companies:

-- How can my company access information about our local partners and intermediaries?

-- What constitutes a red flag?

-- How much will it cost?

-- How much time will it take?

1. How can my company access this type of information? An outside investigative firm that specializes in both domestic and global investigations is typically the first stop for companies interested in conducting investigative due diligence on their local partners and intermediaries. The best of these firms have at their disposal a global network of resources capable of identifying significant information in any jurisdiction, be it a broker's prior conviction for bribing a government official in South Africa, a distributor's undisclosed personal ties to local government officials in Indonesia, or a lawyer's less-than-stellar reputation in Romania.

In some cases, this information is obtained through electronic searches of court records, business registries, or local press archives. In other cases, particularly in areas of the world where public records are scant, human intelligence is often the best, most reliable source of information. For example, discreet inquiries might be made of the local partner's professional associates and neighbors, or an interview might be conducted with former law enforcement officials, local journalists, or government officials who are particularly knowledgeable about the regional business and political climate and the players therein.

2. What constitutes a red flag? Investigators are trained to identify all manner of adverse information with respect to partners and intermediaries, ranging from obvious signs of trouble, such as a prison record or a lawsuit alleging fraud or misconduct, to less obvious indicators. Information that an investigator might look for:

* Is there a notable lack of information pertaining to your prospective partner? Virtually all brokers, accountants, agents, lawyers, and distributors will generate some level of paper trail, be it licensing information, corporate registrations, or a listing in a phone book. A lack of information may suggest fictitious credentials.

* Does your prospective partner lack a bricks-and-mortar location? This may suggest the use of a shell company.

* Do corporate records, business directories, media records, or advertisements indicate that your prospective partner maintains an interest in any entities in which a government official also maintains an interest?

* Is your prospective partner insisting on unconventional forms of payment, such as cash payments to a third party or a bank domiciled outside of the country where the business is being transacted?