Earlier this week, Jim McGrath, writing in his Internal
Investigations Blog, posted a blog entitled "Human
Trafficking Concerns for 7-Eleven in Wake of Payroll Scam". In this
post McGrath reviewed the seizure of "fourteen 7-Eleven stores on Long Island
and in Virginia while arresting nine owners and managers and seizing property -
including five homes - after one of the largest criminal immigrant employment
investigations ever conducted by the Justice and Homeland Security
Departments." He also reported that there is an ongoing investigation of "40
other 7-Eleven franchises in New York City."
The allegations of human trafficking are bad enough.
McGrath wrote that "the defendants found more than 50 illegal immigrants and
gave them identities stolen from American citizens, including children and dead
people. These employees then worked for as much as 100 hours a week, but were
paid for a fraction of that time, and were forced to live in substandard
housing owned by the operators of the convenience stores." He also noted that
while the stores may have been owned by franchisees, the parent company was
also involved because it not only failed to detect the scheme but "processed
the payroll and sent the wages to the employers for distribution." I would also
suspect the part of the franchisees' fee back to the franchisor was based upon
revenues so any reduction in cost could also inure back up the chain.
McGrath's article got me to thinking about franchisor
liability under the Foreign Corrupt Practices Act (FCPA). It has been a successful
model in the US and now many corporations are looking at overseas expansion
opportunities. Franchise law has become well developed across the US, with many
states developing laws to protect the rights and obligations of both parties in
a franchise agreement. According to an International Franchise Association
survey of nearly 1,600 franchise systems in 2008 stated "nearly two-thirds (61
percent) of respondents currently franchise or operate in non-U.S. markets and
three-fourths (74 percent) plan to begin international expansion efforts or
accelerate their current ventures immediately."
There are no reported FCPA enforcement actions regarding
franchisors. However, the factors in a franchise relationship would appear to
lead to clear FCPA responsibility of the franchisor for its overseas
franchisee's actions. Additionally, court interpretation of the FCPA has held
that it is applicable where conduct, violative of the Act, is used "to obtain
or retain business or secure an improper business advantage" which can cover
almost any kind of advantage, including indirect monetary advantage even as
nebulous as reputational advantage. As almost everyone knows, the FCPA
prohibits payments to foreign officials to obtain or retain business or secure
an improper business advantage. Nevertheless many US companies view franchisees
as different from other types of more direct sales representatives, such as
company sales representatives, agents, resellers or even joint venture
partners, for the purposes of FCPA liability.
I believe that such an analysis is misguided as the
Department of Justice (DOJ) takes the position that a US company's FCPA
responsibilities extend to the conduct of a wide range of third parties,
including the aforementioned company sales representatives, agents, resellers,
joint venture partners and distributors. It does not take too great a leap of
imagination to see that a franchise relationship could be contained within this
interpretation. It does not take too many legal steps to see that a franchisee's
actions can impute FCPA liability to a US franchisor.
There are other factors, unique to the franchise
relationship, which would point towards FCPA liability of the US franchisor. A
US franchisor's intent and the degree of control it exercises over its overseas
franchisees' operations are factors the DOJ/Securities and Exchange Commission
(SEC) might consider in determining whether to pursue an FCPA case against a
franchisor for bribes made by one of its foreign franchisees. It is always in
the financial interest of a US franchisor for its franchisees to be successful
businesses. Additionally, most US franchisors require its overseas franchisee's
to use the same company name for branding. Of course, not only the initial
franchise fee but the franchisee's monthly royalty payment roll up into the
books and records of a franchisor so that might well catch the attention of the
SEC if there is a FCPA books and records violation.
Victor Vital and Jessica Parker-Battle, writing in the
Franchise Law Journal, Winter 2012 Issue, in an article entitled "Implications
of the Foreign Corrupt Practices Act for International Franchising",
believe that a franchisor may not have direct involvement in conduct prohibited
by the FCPA, there may not be the requisite corrupt intent required under the
statute. However, I believe unless a franchisor has an adequate compliance
program in place, a franchisor may well find itself in the shoes of Frederick
Bourke and sustain a finding of conscious indifference.
How would all of this play out for a franchisor? As a
franchisor moves into foreign markets there could well be the temptation to
"grease the skids" and make payments or offer gifts to government officials, or
their family members, to get the permits or permissions necessary to open and
operate. In many countries, bribery is a common way of getting business done, and
there can be tremendous pressure from local agents or franchisee candidates to
follow regional customs and use bribes to become or remain competitive. Even if
it is not the US franchisor's own employees which engage in the FCPA
violations, the US franchisor will still face the risk of an enforcement action
if the franchisee's employees engage in such conduct.
Most franchisors have thorough financial vetting
requirements before allowing any person or business to become a franchisee.
However, how many of these same businesses perform FCPA compliance due
diligence on their prospective overseas franchises? How many US franchisors
have FCPA compliance training programs? How many evaluate, on an ongoing basis,
the FCPA compliance and program of their overseas franchisees? How many US
franchisors have a compliance hotline or other reporting mechanism for any
compliance violations made against their franchisees?
Vital and Parker-Battle suggest that franchisors conduct
thorough research in both the foreign market they hope to enter and on their
potential franchisees. The franchise agreement itself should have strong FCPA
anti-corruption/anti-bribery language and any franchisee, and its key
employees, should receive FCPA training. The franchisor also needs to have a compliance
subject matter expert (SME) available for franchisees and they also suggest
that the franchisor provide an anonymous reporting hotline for FCPA violations.
They end some of their suggested practices for the franchisor with the
following, "it would be prudent to pay particular attention and monitor those
countries in areas where bribery or gifts are encouraged in business relations.
In sum, franchisors must be diligent when entering a foreign market and make
sure to use best practices routinely and consistently."
This last point, about ongoing monitoring, ties into
McGrath's article on the problems which 7-Eleven may now face. It would appear
that the franchisor/parent corporation did no ongoing monitoring of its
franchisees on the employment status of the franchisees' employees. One thing
that the FCPA Guidance makes clear is that statements and hypothesis must be
tested by reviewing the underlying data or transaction. As a compliance
practitioner, you cannot take things at face value. Further, as the FCPA
Guidance also made clear, everything starts with a risk assessment. So if you
are a US franchisor, looking to expand overseas, one of the first things you
should do is to perform a FCPA risk assessment and then use that risk
assessment to implement a full FCPA compliance program within your company
going forward. If you are a US franchisor which has international franchises
but you have not previously reviewed your FCPA requirements, you should do so
as soon as possible. If not, your FCPA exposure may be unlimited....
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
responsible for any loss sustained by any person or entity that relies on this
publication. The Author gives his permission to link, post, distribute, or
reference this article for any lawful purpose, provided attribution is made to
the author. The author can be reached at email@example.com.
© Thomas R. Fox, 2013
For more information about LexisNexis
products and solutions connect with us through our corporate site.