In an article published in the August 30, 2011 Wall Street Journal, entitled "Iran's
Hong Kong Shipping Shell Game", Claudia Rosett reported on efforts by Iran
to reflag ships to companies with Hong Kong registries. While the focus of the
article seemed to point to the Office of Foreign Assets Control (OFAC)
sanctions against US companies doing business with Iran, and other trade sanctions
issues, there was one paragraph that spoke to issue of due diligence under the
Foreign Corrupt Practices Act (FCPA). The FCPA issue raised is that of
continued due diligence of an agent after a contract is signed and the
Author Rosett reported on the efforts of the Port of San
Antonio (Texas) to increase its shipping and air freight between Asia and the
trade corridor connecting San Antonio with the Mexican port of Lazaro Cardenas.
Apparently the Port of San Antonio has been working with an agent, referred to
in the article as Mr. Mak, of a Hong Kong company named H&T International
Transport Limited (H&T). It turns out that Mr. Mak and H&T are also
agents for Iranian shipping companies.
As interesting as that might seem, that was not the part
which caught my eye, it was the following:
"In a recent phone interview, Port San Antonio's vice
president for business development, Jorge Canavati, said the Port San Antonio
authorities have continued to work with H&T's Mr. Mak: "We're developing
projects together." He said Mr. Mak had not informed him that H&T in
Hong Kong has been serving as an agent for 19 ships on Treasury's Iran
If there is anyone out there subject to the FCPA who
thinks they will be absolved of FCPA liability if their agent does not inform
them that they also represent ships owned by Iran's state shipping company? If
so, please do not raise your hand.
I thought that this might be a good lesson learned for
the following proposition. Even if you have done all the background due
diligence that is appropriate for a foreign agent, it is the responsibility of
the US company to perform additional due diligence, at a minimum, every three
years. The better practice would be every two years because your agency
agreement should only be for two years. Rosett reported in her article that Mr.
Mak and H&T had been working with the Port of San Antonio since at least
I also thought it might be pertinent to assess the steps
that a company should take in performing this due diligence. The review process
should contain, at a minimum, inquiries into the following areas:
- Need for the relationship with an Agent: The
Company Business Team or Business Person should articulate the business case
for the proposed Agent relationship. This must be approved by management before
it goes to legal or compliance for review.
- Credentials: List the critical reasons for
selection of the proposed Agent. This should include a discussion of the
business partner's background and experience.
- Ownership Structure: Describe whether the
proposed Agent is a government or state-owned entity, and the nature of its
relationship(s) with local, regional and governmental bodies. Are there any
members of the business partner related, by blood, to governmental officials?
- Financial Qualifications: Describe the financial
stability of, and all capital to be provided by, the proposed Agent. Obtain
financial records, audited for 3 to 5 years, if available.
- Personnel: Determine whether the Agent will be
providing personnel, particularly whether any of the employees are government
officials. Obtain the names and titles of those who will provide services to
the US Company.
- Physical Facilities: Describe what physical
facilities will be provided by the Agent. Who will provide the necessary
capital for their upkeep?
- Reputation: Describe the business reputation of
the proposed Agent in its geographic and industry-sector markets.
These inquiries are required under the US Federal
Sentencing Guidelines and the guidance offered by the Department of Justice
(DOJ) Opinion Releases and the publicly released Plea Agreements and Deferred
Prosecution Agreements (DPA) entered into by US companies who admit to
violating the FCPA. This due diligence should be recorded and maintained by the
US Company for review, if required, by a governmental agency. Some of the due
diligence can be handled by the US Company's in-house legal and/or compliance
groups. However, it is recommended that for any high risk Agent, an outside
forensic auditing firm and outside legal counsel be retained to conduct the due
diligence investigations. This brings a level of expertise usually not
available within a corporation plus an outside perspective less susceptible to
in-company business pressures.
After this initial inquiry is concluded the US Company should move forward to
perform a background check on a prospective Agent by using the following
- References: Obtain and contact a list of
- Embassy Check: Obtain information regarding the
intended business partner from the local US Embassy or a Commerce Department
report such as an International Company Profile Report.
- Compliance Verification: Determine if the Agent,
and those persons within the Agent who will be providing services to the US
Company, have reviewed or received FCPA training.
- Foreign Country Check: Have an independent third
party, such as a law firm, investigate the business partner in its home country
to determine compliance with its home country's laws, licensing requirements
- Cooperation and Attitude: One of the most
important inquiries is not legal but based upon the response and cooperation of
the Agent. Did the business partner object to any portion of the due diligence
process? Did it object to the scope, coverage or purpose of the FCPA? In short,
is the business partner a person or entity that the US Company is willing to
stand up with under the FCPA?
After a company completes these due diligence steps,
there should be a thorough review by the Board, or other dedicated Management
Committee, on the qualifications of the proposed foreign business relationship
partner. It is critical that the reviewing Committee is not subordinate to the
US company's business unit which is responsible for the business transactions
with the Agent. This review should examine the adequacy of due diligence
performed in connection with the selection of overseas partners, as well as the
Agent's selection of subcontractors and consultants which will be used for
business development on behalf of the US Company.
The steps listed herein do not include the use of, or
continued management of, an Agent. These steps need to be taken by all US
Companies entering into, or already engaged in, a relationship with an Agent as
the FCPA applies to all US Companies, whether public or private. Remember, due
diligence, due diligence and once that has been completed; more due diligence.
And never, ever, ever rely on the fact that
the agent did not tell you and your company that they also represent Iranian
Visit the FCPA Compliance and Ethics Blog,
hosted by Thomas Fox, for more commentary on FCPA compliance, indemnities and
other forms of risk management for a worldwide energy practice, tax issues
faced by multi-national US companies, insurance coverage issues and protection
of trade secrets.
This publication contains general information
only and is based on the experiences and research of the author. The author is
not, by means of this publication, rendering business, legal advice, or other
professional advice or services. This publication is not a substitute for such
legal advice or services, nor should it be used as a basis for any decision or
action that may affect your business. Before making any decision or taking any
action that may affect your business, you should consult a qualified legal
advisor. The author, his affiliates, and related entities shall not be
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© Thomas R. Fox, 2011
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