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Getting Due Diligence Just Right

Posted on 04-20-2015 by Ulyana Androsova

 Lately, large international companies have been capturing attention for the wrong reason—non-compliance with anti-corruption laws like the Foreign Corrupt Practice Act (FCPA). When the dust settles, these organizations face substantial fines and other negative consequences—set up in deferred prosecution agreements—that increase the financial burden even more. This year, however, enforcement agencies have made it clear that the trend of increasing FCPA prosecutions will not only impact major corporations; small and mid-size companies—even individuals—that have global business dealings will not be able to fly under the radar. Do you have adequate due diligence in place?

 How can Companies Minimize FCPA Compliance Risk?

In announcing charges for FCPA violations against a Smith & Wesson holding company last summer, Kara Brockmeyer, chief of the SEC Enforcement Division’s FCPA Unit, said “This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales. When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.”

 While large corporations may take the fines in stride, small and mid-size companies may find that more difficult. According to a guest column in the Buffalo Law Journal, “In 2013-14, the average ‘closing cost’ of an FCPA settlement was over $80 million with none of the announced resolutions for less than $1 million.” What’s more, FCPA settlements have other hidden financial pitfalls—legal and accounting fees incurred to defend against charges, reputational damage and loss of eligibility to take on government contracts.

Clearly, prevention is crucial. Yet, like Goldilocks, small and mid-size companies are challenged to find due-diligence practices that are not too small to mitigate risk or too big to manage efficiently. Without the same personnel and financial resources available to large corporations, how can these organizations develop a due-diligence process that is just right?

 Create a Regulatory Compliance Check List

In order to understand the risks, you need to know what to look for. Some of the main sources of potential FCPA compliance risk include:

  • Third parties—Smaller organizations without a strong global footprint may find it preferable to use local agents to do business in foreign countries. To protect against possible violations, companies need to conduct adequate supplier screenings. According to the Resource Guide to the Foreign Corrupt Practices Act, 90 percent of FCPA compliance violations result from third-party relationships.
  • Location— Some of the developing countries that offer the greatest opportunities for businesses are also higher risks for corruption. Due diligence research should include the all of the countries in which organizations conduct business to ensure that proper precautions are taken.
  • M&A Activity—When a U.S. company enters into a joint venture with a foreign company, it can be at risk of FCPA violations—even for the past bad acts of the acquired organizations. Enhanced due diligence can help you identify potential problems BEFORE a merger to eliminate that risk.

With an eye towards the potential FCPA risks and a right-sized due-diligence process, the trend for FCPA enforcement actions doesn’t have to continue to rise. 

3 Ways to Apply This Information Now

  1. Explore our solutions designed to help you save time and resources when conducting due diligence.  
  2. Check out our guide to due diligence to find out 9 critical steps to take.
  3. Share this blog on LinkedIn to keep the dialogue going with your colleagues and contacts. 

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