I. The Problem
The Foreign Corrupt Practices Act (FCPA) world is
littered with cases involving freight forwarders, brokers and agents in the
shipping and express delivery arena. Both the Department of Justice (DOJ) and
Securities and Exchange Commission (SEC) have aggressively pursued third party
business relationships where bribery and corruption have been found. This is
particularly true where companies are required to deliver goods into a foreign
country through the assistance of a freight forwarder or express delivery
service. There are several major risk points. These include:
Under the FCPA a company (or individual) can put itself
at risk under three different knowledge standards:
The Panalpina enforcement action involved both the
actions of the agent (Panalpina) and five of its energy customers. As noted by
the FCPA Blog in "Making history today for the most companies to simultaneously
settle FCPA-related violations", this enforcement action levied fines and
penalties of approximately $236.5 million. Additionally, all settling
defendants agreed to Deferred Prosecution Agreements (DPA's), with the
exception of one which was given a Non-Prosecution Agreement (NPA).
The freight forwarded itself, Panalpina, paid over $80
million in fines and penalties. Panalpina admitted to three main illegal
activities, these were: (1) customs clearance for its customers despite
non-compliance or circumvention of customs formalities; (2) illegally obtaining
a government contract for itself; and (3) obtaining unwarranted favorable tax
treatment for its customers.
II. The Response
How can a company respond to protect itself or at least
reduce its potential FCPA risk with regarding to a logistics company, freight
forwarder or express delivery company? Obviously having a thorough risk
assessment program and due diligence program are critical. After determining
risk, move to perform due diligence based upon this risk. However, there are
some general questions that you should ask, both internally and to your
1. Relationship. What is your relationship with the third party? Is it
purely arms-length? Is it sales agent making a solicitation? Is it a
consortium, which may be a lower risk? Is it partnership of JV, if so what is
your control? Is it subcontractor or supplier? All of these have different risk
2. Business Formation. What is the character of the third party? Is it a
US based company, is it subject to a robust national compliance law? Is it
private/public? Who else do they represent? Length of time in business? Who are
the principals and are they governmental officials?
3. Compensation. How do you compensate the third party? Is it
bonus-based paid at the conclusion of a transaction? Will the representative
have an expense account? If so how is it given to them, for instance will you
pay on a lump sum v. verified expenditures? How will they be paid, local
currency into a bank account, cash or check? What is the level of compensation?
Are you over-compensating based upon the market; you are taking a chance that
the third party could share it with others.
4. Location. What is the geographic location and is it one of the usual
suspects on the TI Corruptions Index?
5. Industry. What is the industry or sector that you are engaged? This
can be significant because certain industries/sectors such as infrastructure,
medical industry, defense contractors are facing increased DOJ/SEC scrutiny.
6. Process. What is the process by which the business opportunity arose?
What is the bidding process? Who invited you? Is it an open bid? Did you
respond to an RFP? Did you compromise you own standards to bid? Is there a
mandated partner assigned by the foreign government?
After you ask some of these questions, investigate your
risks and evaluate them; you should incorporate these findings into a contract
with appropriate FPCA compliance terms and conditions. This contract should
announce to your to third party freight forwarder/express supplier of your
expectations regarding their compliance program. Your contract should also
allow for management of the compliance relationship. Your contract should
require training and certification by verified provider or by your company. A
new best practice has been to require a company funded Business Monitor whose
job is to ensure compliance with your company's compliance program.
III. RISK MANAGEMENT: The Min Model
James Min, Vice President, Int'l Trade Affairs & Compliance at DHL Express
(USA) Inc., developed a risk matrix for the freight forwarders/express delivery
industry. In this Min analyzes risks by multiplying factors noted herein and
thus scoring. This model shows that location should not be the sole criteria
for risk. The factors in the Min Model are the performance of your company's
customers clearance brokers and how far that performance varies from the norm
your company normally receives. In the below chart, +1.00 equals average
clearance time. >1.0 equals faster than average and <1 means slower than
The Min Model
Min presented his model at the ACI FCPA Bootcamp,
recently held in Houston, TX. He graciously allowed us to present this risk
analysis model. The key in this approach is how often the Customs
Broker/Express Delivery Service varies above the average for customs clearance
times. If the percentage of customs clearance performance is so great that your
vendors variance is above 100% most of the time, this could be a Red Flag that
bribery or corruption is involved. This should lead to further investigation,
due diligence, or asking of questions of your vendor.
Almost every business transaction engaged in by a freight
forwarder, express delivery service or customs broker, outside the US involves
a foreign governmental official. Every time your company sends raw materials
into, or brings them out of, a country there is an interaction with a foreign
governmental official in the form of a Customs Official. Every customs
transaction involves a payment to a foreign government and every transaction
involves some form of a foreign governmental regulatory process. While the
individual payment per transaction can be small, the amount of total
transactions can be quite high, if a large volume of goods are being imported
into a foreign country.
Conversely interacting with international tax authorities
can present problems similar to those with customs officials, but the stakes
can often be much higher since tax transactions may be less in frequency but
higher in financial risk. These types of risks include the valuation of raw
materials for VAT purposes before such materials are incorporated into a final
product, or the lack of segregation between goods to be sold on the foreign
country's domestic market as opposed to those which may be shipped through a
free trade zone for sale outside that country's domestic market.
If you utilize the services of a third party for any of
the transactions listed above, that company's actions will go a long way in
determining your company's FCPA liability. You must have a thoughtful
process and document that process.
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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