Organizations are increasingly engaging in international business transactions. Many of these transactions will, often by necessity, involve the use of a third party to assist in the facilitation of the transaction. Local individuals or organizations in foreign countries are often utilized to assist organizations in navigating the foreign market and cultural issues. Use of these third parties, known as intermediaries, carries a significant corruption risk. There are many examples of enforcement actions taken under anti-corruption laws against organizations that result from and involve use of an intermediary by such organizations.
As noted in earlier articles regarding anti-corruption laws and public officials, Canada, the United States and many European states have developed comprehensive anti-corruption laws which prohibit bribery of foreign public officials. These prohibitions generally extend to and include instances where a bribe is facilitated by a third party. This means an organization using an intermediary may nonetheless face liability where the activities of an intermediary violate applicable anti-corruption laws.
Required Intermediaries for Government Relations Activities
Some foreign governments require the appointment of an intermediary in order to do business in that state where the government is the potential client. Use of an intermediary may also be attractive to organizations in that an intermediary can provide knowledgeable advice to simplify the navigation of procedures involved in the foreign transaction. Furthermore, using an intermediary allows organizations to mislead themselves into thinking they have morally distanced themselves from any bribery which might take place in a foreign jurisdiction. Organizations may rationalize payments made to an intermediary as mere fees required to do business in the foreign state, rather than a bribe. Moreover, the use of an intermediary distances an organization from directly engaging in any bribery of a foreign public official. Particularly where a foreign government has mandated the use of an intermediary, it is easy for an organization to fail to recognize corrupt practices it might be engaging in.
Nonetheless, use of an intermediary due to government compulsion does not necessarily ensure the legitimacy of a transaction. In fact, the obligation to use an intermediary is often a red flag. As bribery conducted through an intermediary is captured by the offences imposed by anti-corruption laws in most developed countries, it is paramount for organizations to be wary of the use of intermediaries in international transactions.
Controls and Procedures
Before engaging an intermediary, it is critical for organizations to perform proper due diligence on the intermediary. In order to mitigate any corruption risk, background investigations must be undertaken and any information discovered must be thoroughly scrutinized and evaluated. Factors to be considered in such due diligence include, but are not limited to, the reputation of the intermediary and the foreign state, whether the intermediary is related to or has any connections to the foreign government, whether the intermediary has any other method of influence over a government official, the capabilities of the intermediary and the compensation requested by the intermediary.
Some indicators of an intermediary whose services should receive extra scrutiny include an intermediary who requests unusually high fees or unusual payment terms, an intermediary located in a country frequently associated with corrupt practices, an intermediary who has close relations with public officials, and an intermediary who appears to lack the resources, knowledge and experience to perform the services offered.
One strategy organizations must use to attempt to ease the corruption risk associated with the engagement of an intermediary is requiring a written contract of engagement. The use of this measure helps to ensure accountability and transparency. Such a contract must include a description of the services to be provided, set out the amount and form of compensation, include representations regarding any connections to government officials and require disclosure of any corrupt conduct. In determining appropriate compensation, reference must be made to the prevailing market rate for the types of services being provided. Additionally, the contract must include an explicit prohibition of bribery. This prohibition must include a requirement for the intermediary to be familiar with and act in compliance with the organization’s anti-corruption policies and applicable anti-corruption laws.
After engaging an intermediary who has been properly vetted and has signed a contract with the organization, organizations must continue to monitor the intermediary throughout the relationship. The existence of a contract alone without further enforcement activity will not alleviate the consequences of a corruption violation. An organization must monitor its intermediaries in order to mitigate such consequences. Ongoing monitoring of an intermediary may include periodic performance reviews and auditing of the intermediary’s books and records. Any indication of potential misconduct must be thoroughly investigated, and the contract should include a right of immediate termination of the contract and return of all compensation in the event of any corrupt conduct.
Anti-corruption legislation creates offences against bribery of foreign public officials. Use of an intermediary may be necessary to transact business in a foreign country. However, organizations must identify and monitor any potential red flags that may signal an intermediary’s involvement in corrupt practices. Using an intermediary to provide a bribe, either intentionally or inadvertently, will subject an organization to penalties under applicable anti-corruption laws. There are many examples of well-known organizations that are subject to corruption enforcement actions in connection with the use of intermediaries, such as Rolls-Royce, Och-Ziff and Total among others, which actions resulted in hundreds of millions in penalties for those organizations.
Due to the substantial risk associated with transacting business in foreign countries using intermediaries, it is crucial that organizations implement a comprehensive due diligence screening of intermediaries. Organizations can also reduce this vulnerability through the use of appropriate written contracts, which include on-going monitoring and review of intermediary activities. While such practices do not eliminate corruption enforcement risk for organizations that engage intermediaries, they may help mitigate the consequences resulting from a corruption investigation and enforcement action.