The use of local intermediaries, such as agents, can create corruption risks for businesses. International companies often use local agents in countries where they don’t have a branch of their own. Experience shows that these agents are increasingly being associated with corruption, such as the payment of bribes to local officials to secure orders or arrange permits. See, for example, the article in the national financial newspaper Het Financieele Dagblad (only available in Dutch) of 2 August 2018. To prevent such (corruption) risks as much as possible, good third party screening is crucial.
If a company becomes involved in a bribery case – especially if it did not have (effective) procedures in place to prevent corruption, or if had failed to comply with these – it may be faced with substantial fines, withdrawal of permits, mandatory instructions, or even total exclusion from important public contracts.
In recent years, the Dutch Public Prosecution Service has paid greater attention to corruption within the international business community and has imposed harsher penalties for (foreign) corruption (often in the form of high settlements). It is therefore essential to have, implement, and comply with procedures to prevent and mitigate corruption risks as much as possible. In doing so, paying attention to dealings via or with local third parties, cannot be avoided. An important part of this is effective screening of the third parties with whom a company works, i.e. “third party due diligence”. That applies not only to agents but also to suppliers, distributors, other customers, “consultants”, and other intermediaries.
When arranging sound third party screening, it’s first of all important to identify the risks that the company is or may be facing. To start off, that means, a structured approach to identifying third parties. After they have been identified, an analysis needs to take place of the corruption risk related to the third party in question, the likelihood of that risk materialising, and the impact thereof.
The main indicators for such a risk analysis are:
- the type of third party concerned (supplier, distributor, agent, consultant, etc.);
- the corruption risk of the country where that party operates;
- the risk of the industry within which the party is dealing;
- the size of the transaction; and
- the risk posed by the parties with whom the third party engages.
Experience shows that some sectors are more prone to corruption than others. For example, the use of agents in the defence, construction, telecommunications, pharmaceutical, aviation, and energy sectors entails a greater risk because in those sectors companies are, to a large extent, dependent on (for example) agents who are linked to the government.
Making the analysis also requires a certain amount of (background) information about the third party (the “screening”). Depending on the type of third party, this may include an identity check, determining who the directors and shareholders are, a check on bad press, and a check against the sanctions lists. It’s important that the company also verifies the information that the (local) third party itself provides for the analysis. In the event of ambiguities or contradictions in the information provided or in the answers given, it’s the responsibility of the company to also act on this and to ask follow-up questions. Not (wanting) to answer questions (correctly or fully), may be an indication that something is wrong (a “red flag”).
In addition to screening when entering into a new relationship with a third party, it’s also very important that periodic screening and monitoring is carried out. For relevant developments may require the risk analysis to be revised or additional risk-mitigating measures to be adopted. The study by Het Financieele Dagblad shows that of 25 internationally operating companies, only 23% regularly screen their intermediaries. It would seem that in practice, periodic monitoring of third parties often proves to be a major stumbling block for companies.
Useful documents when setting up a third party screening procedure include the ICC Anti-Corruption Third Party Due Diligence: A Guide for Small and Medium Size Enterprises (2015) published by the International Chamber of Commerce (ICC), and the Transparency International Corruption Index, which provides a global overview of the extent of corruption risks in various countries.