Foreign
Corruption Risks
A Holistic Look at Third Party Risks
In the FCPA world, we
tend to get myopic. We see complex issues and business operations through the
prism of anti-corruption risks. Businesses and Chief Compliance Officers,
however, have a very different perspective.
When pontificating on life lessons to my
children (who are no longer children), I frequently cite the importance of
seeing issues from another person’s perspective. Many issues come into focus
when you consider how another person has experienced and sees a set of issues.
This life lesson applies when
collaborating with CCOs and a company on third-party risks. (Who could ever
predict that a life lesson can play out in anti-corruption compliance!)
A CCO identifies a company’s third
parties and has to consider a set of risks, some of which are not so obvious.
Companies have less ability to control
third parties than they do their own employees. That is a fundamental
limitation that makes life difficult for companies that rely on a network of
third party agents, distributors and customs brokers.
We all know that third parties can
create significant corruption risks and many people are attuned to addressing
those risks. The FCPA specifically addresses this risk and takes a broad view
of enforcement and liability for third party bribery.
Third parties also create significant
money laundering (and terrorist financing risks) that have to be addressed.
Anytime a company makes payments or receives payments there is a risk of money
laundering. The risk grows when a counterparty assigns the right to a third
party to receive a payment or to make a payment.
In simple terms, money laundering
prohibits companies from engaging in financial transactions that are intended
to disguise proceeds of crime or to facilitate criminal activity. As a
consequence, companies have to conduct AML “due diligence” of its customers and
vendors/suppliers to ensure that no payments fall within the money laundering classification.
The risk of AML violations, however,
increases significantly with the use of third parties who might pay companies
on behalf of a customer or receive payments from a company for a
vendor/supplier.
As in the case of sales agents,
distributors and other third parties, the question boils down to why a company
is using a third party to conduct a financial transaction on its behalf. There
are many legitimate purposes of third party payers and recipients, but there
can also be nefarious purposes as well.
Assuming there is a legitimate
justification for the use of a third party, AML compliance programs require a
company to engage in due diligence – Know Your Customer (“KYC”) – to make sure
there is no undisclosed government interest or no affiliation with a prohibited
person. There are red flags that can develop in reviewing these relationships
and transactions, and CCOs have to address these AML risks.
Aside from corruption and AML risks,
companies have to make sure third parties are not owned by, or affiliated with,
prohibited parties designated in US prohibited persons and sanctions programs.
Many companies have been relying on software vendors who provide services to
check prohibited persons lists.
The screening process has become more
complicated with OFAC’s recent reinterpretation of the “50 percent” rule.
As a consequence, the level of due
diligence required to screen a potential third party and its beneficial owners
has increased. Companies have to devote more time and efforts to prohibited
persons’ lists, along with the ever-expanding sanctions programs. Third parties
are a major risk in this area and have to be screened carefully.
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