Carroll Shelby died last week. For anyone who following
racing or loved the Muscle Car Era, no light shone brighter that Shelby's. In
1959 (a little before I started to follow racing) Shelby was the first Texan to
win the 24 Hours of Le Mans. Forced to retire from racing due to a medical
condition, Shelby became one of the top race car designers in the 1960's with
his Shelby-American teams winning the 24 Hours of Le Mans, driving Fords
designed by Shelby, to victories in 1966 and 1967. But I remember Carroll
Shelby for those souped-up, mean as heck Shelby Mustangs, which debuted in 1965
and lasted until the end of the Muscle Car Era in 1971.
So what's the compliance angle here? Well, believe it or
not, it involves Wal-Mart. In its obituary for Shelby, the New
York Times (NYT) reported that "Early prototypes broke apart because of
stress on the fragile frames. "When you try to put 300 horsepower in a car
designed for 100, you learn what development means," Shelby recalled in a 2002
interview with Sports Illustrated." From this I took away that any program,
whether it is designing a race car or an atin-corruption compliance program
requires development until you get it right.
I thought about this idea in the context of franchising
and the Foreign Corrupt Practices Act (FCPA). Many franchisors do business
overseas themselves and therefore should have a robust FCPA program based upon
directly doing business internationally. However, if they franchise their
operations internationally, they may have as much FCPA-based risk exposure
through their franchisees operations. What are some of the FCPA risks for a
franchised business internationally? In his book entitled "Foreign
Corrupt Practices Act - A Practical Resource for Managers and Executives"
Aaron Murphy, a partner at the firm of Latham and Watkins, explored the
question of what are "the most common problems areas where managers get
themselves into FCPA trouble." In a chapter entitled "You Do More With the
Government Than You Think" Murphy gives several examples of how any US company
doing business overseas will come into contact with a foreign governmental
official and, thereby, create a risk for possible FCPA liability. The following
interactions would certainly apply to a retailer:
Interactions with Customs Officials.
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.
Interaction with Tax Officials.
While noting that interacting with international tax authorities can present
problems similar to those with customs officials, Murphy observes that 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 Value Added Tax (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
Licensing and Permits. If
your company is a retail seller of clothes, cosmetics etc., every physical
location that you sell your goods in will require some type of license to
operate your business. It could require multiple licenses such as a national
license, state license and local municipal license, additionally you will need
a building permit if you intend to build out or modify your retail stores.
Work Permits and Visas. If
your company does any business overseas it will have to send someone from the
home office to operate in-country at some point. In the post-9/11 world this
probably means that, at a minimum, your company will have to obtain a visa for
each employee who enters the foreign country and perhaps a work permit as well.
The visa process can start in the United States with a trip to foreign
government consulate or even the embassy and at that point you are dealing with
a foreign governmental official. The work permit process can also begin in the
United States but often may continue in the foreign country.
Inspections and Certifications.
Consider the Tex-Mex restaurant chain which desires to take its cuisine across
the world. In any city in the world there will be some type of certification
process to enable to the business to set up and start operating and then there
will be the need for ongoing inspections for sanitary conditions. Such
inspections may be rare but if there is "slime in the ice machine" it
may be grounds to close the restaurant.
As Murphy points out, it is clear there are many
different types of FCPA risk out there which your compliance program needs to
assess and address. Most companies are aware of risks of third parties in
commercials operations, such as sales agents, resellers or distributors.
However, the recent Wal-Mart matter has raised the awareness of risks from
non-commercial third parties, particularly those which interact with a foreign
government on the behalf of a company. There are many lessons which can be
drawn from the Wal-Mart case but I think that two, (1) that you do more
with the government than you think and (2) the risks in using non-commercial
third party agents, are very large areas that you may need to factor into the
development of your compliance program going forward.
Lastly, do not forget the example of Carroll Shelby, Not
only did he move from race winning driver to race winning car developer but
over 30 years after the last Shelby Mustang from the Muscle Car Era rolled off
the Ford assembly, he teamed with Ford to design a new Shelby Mustang for the
company's centenary in 2003. Keep on truckin' Carroll Shelby!
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
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© Thomas R. Fox, 2012
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