Worried about your global partners?
By Scott Moritz

GLOBAL BUSINESS Worried about your global partners? If implemented properly, investigative due diligence is unsurpassed as a low-costy high-value tool in learning about a company's overseas connections —particularly in light of stepped-up enforcement ofthe Foreign Corrupt Practices Act. BY SCOTT MORITZ AND MAXIMILIAN BLOCK T HE 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 of- ficials 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 lustice levied the two largest fines in FCPA history— a $44 mil- lion fine against a Texas-based oil services company that had made illegal payments to government offi- cials in Kazakhstan, and a $26 million fme against a Houston gas drilling company that had made illegal payments to officials in Nigeria. The stepped-up enforcement — and the unprec- edented 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 ex- posure to FCPA liability— namely, investigative due diligence. Whether the violation is happening halfway around the world or just south of the bor- der, 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 lustice, was asked which factors come into play when weighing whether to prosecute a corpora- tion for FCPA violations. He replied that he asks to see a report on the due diligence performed on the company's local partner. Ofparticular interest, Mendelsohn continued, was how much the company knew about the own- ership 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 be- Scott Moritz {at left} is an executive director with Daylight Forensic & Advisory LLC in its New York City headquarters. A former FBI special agent, he has more than 21 years of international investigative, foren- sic accounting, and law enforcement experience. Maximilian Block is a manager with Daylight in New York, providing investigative due diligence services in connection vi/ith fraud investigations, mergers and acquisitions, private equity investments, and asset tracing. He previously was a journalist working on international investigative and news stories. Daylight Forensic & Advisory is an international regula- tory consulting and investigative firm specializing in Foreign Corrupt Practices Act investigations and compliance, investigative due diligence, anti-money laundering consulting, regulatory compliance, forensic technology, healthcare compliance, and fraud risk manage- ment (vwvw.daylightforensic.com), FIRST QUARTER 2008 3S GLOBAL BUSINESS yond assisting the U.S. company in securing gov- ernment business or approval. As varied as they are, all of Mendelsohn's ques- tions point to a singular message that the Justice Department is putting before CEOs and chief com- pliance officers throughout the country: It is your responsibility to understand who you're doing busi- ness with overseas. Questions needing answers That message naturally gives rise to a number of questions for senior leadership of major compa- nies: — 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 in- formation? An outside investigative firm that spe- cializes in both domestic and global investigations is typically the first stop for companies interested in conducting investigative due diligence on their local partners and intermediar- ies. The best of these firms have at their disposal a global network of resourc- es 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 persona] ties to local government officials in Indo- nesia, or a lawyer's less-than-stellar reputation in Romania. In some cases, this information is obtained through electronic searches of court records, busi- ness registries, or local press archives. In other cases, particularly in areas of the world where pub- lic records are scant, human intelligence is often the best, most reliable source of information. For ex- ample, 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 govern- ment 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 informa- tion with respect to partners and intermediaries, ranging from obvious signs of trouble, such as a Investigative due diligence on local intermediaries is usually very affordable. prison record or a lawsuit alleging fraud or miscon- duct, to less obvious indicators. Information that an investigator might look for: • Is there a notable lack of information pertain- ing to your prospective partner? Virtually all bro- kers, accountants, agents, lav^^ers, and distributors will generate some level of paper trail, be it licens- ing 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 en- tities in which a government official also maintains an interest? • Is your prospective partner insisting on uncon- ventional 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? • Likewise, does your prospective partner's family name or home address match or closely resemble the names or home addresses of any government officials? Again, this may signal an inappropriate beneficial relationship. 3. How much will it cosr? While costs vary, inves- tigative due diligence on local partners and interme- diaries is usually very affordable. When compared to the potential legal, financial, and reputational costs that often result from an FCPA investigation, the fees are nominal, particularly when the multi- million-dollar fines levied by the Department of Justice in 2007 are taken into account. 4. How much time will it take? Adverse infor- mation can be identified within the first hours of an investigation, and a well-formed IDD team will often share this information with a client immedi- ately. Typically, however, a comprehensive investi- gation of a single target subject or entity requires several weeks from inception to the delivery of a report. The pressing challenge If implemented properly, investigative due dili- gence is unsurpassed as a low-cost, high-value tool in learning about a company's overseas business partners. But many large, multinational companies 36 DIRECTORS & BOARDS GLOBAL BUSINESS have thousands and, in some cases, tens of thou- sands of business partners in dozens of countries on multiple continents. So the immediate challenge is not whether a compliance team ought to under- take an investigation of one of its overseas partners. The challenge is determining which overseas part- ner to investigate. Enter the intermediary In the vast majority of FCPA prosecutions in the past several years, the bribes to foreign public of- ficials were made by intermediaries. These inter- mediaries fell into numerous categories, includ- ing freight forwarders, accounting and law firms, lobbyists, consultants, brokers, distributors, and agents, but they shared some common character- istics: — They had the ability to act on behalf of the company; — They often had he ability to legally bind the company to contracts; and, — They were negotiating business that was of high value, either directly with the foreign govern- ment or with agencies positioned to provide gov- ernmental approval But even if a multinational company focused solely on its intermediaries, screening all of them would still be prohibitively expensive. This is why it's important to apply risk ranking to an overall vendor population in an effort to identify those third parties that represent heightened FCPA risk. (For the purposes of this discussion, we are using "vendor" in the broadest sense of the word and mean to include any individual or entity contained in a company's master vendor file of entities or in- dividuals who have received disbursements from the company.) The variables that should be considered in this analysis include entities in countries that score lower than 5.0 on Transparency International's Corruption Perceptions Index (CPI); whether a country has signed the Organisation for Econom- ic Co-operation and Development (OECD) Anti- Bribery Convention; high-risk products/industries; vendors that have the ability to bind the company Adverse information can be identified within the first hours of an investigation. to contracts or can initiate transactions; agents or representatives that interact directly or indirectly with public officials; and vendors involved in as- sisting the company to secure high-value contracts requiring government approval. These variables or risk factors are best es- tablished in collaboration with the client. They can then be used to develop a data mining protocol and run against the com- pany's master vendor file to cost-effectively isolate high bribery risk vendors. Once the high bribery risk vendors have been identi- fied, it is easier to mitigate a company's FCPA risk by narrowing investigative focus on those vendors that have high aggregate bribery risk scores. A straightforward solution Investigative due diligence can be a truly effective means of mitigating FCPA risk, particularly when it's used as the lynchpin of a broader anti-bribery and FCPA mitigation strategy. That strategy should include training, the designation of a senior com- pany official charged with program oversight, and contracts with all third parties that bind them to the company's anti-bribery program. Does the need exist for such a program? If the upswing in multimillion-dollar fines is any indication, the Justice Department seems to be sending a clear signal that the answer to that ques- tion is yes. If companies were in need of additional clarification on the point, Assistant Attorney Gen- eral Alice S. Fisher provided it in a speech to the American Bar Association in October 2006: "Do we care about the FCPA?" Fisher asked. "Is the FCPA relevant in today's global business cli- mate? Is enforcing the FCPA a high priority? "The answer to all of those questions," Fisher said, "is yes." • The authors can be contacted at smoritz@daylightforen- sic.com and mblock@daylightforensic.com. FIRST QUARTER 2008 37

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