This post continues to outline what I believe are the five steps in the life cycle of third party management. Today I will look at Step 4, the contract. However, before we get to the contracting stage a word about what to do with Steps 1-3. You cannot simply obtain the information detailed in these first three steps; you must evaluate the information and show that you have used it in your process. If it is incomplete, it must be completed. If there are Red Flags, which have appeared, these Red Flags must be cleared or you must demonstrate how you will manage the risks identified. In others words you must Document, Document and Document that you have read, synthesized and evaluated the information garnered in Steps 1-3. As the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) continually remind us, a compliance program must be a living, evolving system and not simply a ‘Check-the-Box’ exercise.
After you have completed Steps 1-3 and then evaluated and documented your evaluation, you are ready to move onto to Step 4 – the contract. Obviously any commercial relationship should be governed by the terms and conditions of a written contract. Clearly your commercial terms should be set out in the contract. In the area of commercial terms the FCPA Guidance intones “Additional considerations include payment terms and how those payment terms compare to typical terms in that industry and country, as well as the timing of the third party’s introduction to the business.” This means that you need to understand what the rate of commission is and whether it is reasonable for the services delivered. If the rate is too high, this could be indicia of corruption as high commission rates can create a pool of money to be used to pay bribes. If your company uses a distributor model in its sales side, then it needs to review the discount rates it provides to its distributors to ascertain that the discount rate it warranted.
In addition to the above analysis from the compliance perspective, you should incorporate compliance terms and conditions into your contracts with third parties. I would suggest that you begin with some type of compliance terms and conditions template, which can be used as a starting point for your negotiations. The advantages of such a template are several; they include: (1) the contract language is tested against real events; (2) the contract language assists the company in managing its compliance risks; (3) the contract language fits into a series of related contracts; (4) the contract language is straight-forward to administer and (5) the contract language helps to manage the expectations of both contracting parties regarding anti-bribery and anti-corruption.
What are the compliance terms and conditions that you should include in your commercial contracts with third parties? In the Panalpina Deferred Prosecution Agreement (DPA), Attachment C, Section 12 is found the following language, “Where necessary and appropriate, Panalpina will include standard provisions in agreements, contracts, and renewals thereof with all agents and business partners that are reasonably calculated to prevent violations of the anticorruption laws, which may, depending upon the circumstances, include: (a) anticorruption representations and undertakings relating to compliance with the anticorruption laws; (b) rights to conduct audits of the books and records of the agent or business partner to ensure compliance with the foregoing; and (c) rights to terminate an agent or business partner as a result of any breach of anti-corruption laws, and regulations or representations and undertakings related to such matters.” In the Johnson & Johnson (J&J) DPA, the same language as used in the Panalpina DPA is found in Attachment C, entitled “Corporate Compliance Program”. However, in Attachment D, entitled “Enhanced Compliance Obligations”, the following language is found: “Contracts with such third parties are to include appropriate FCPA compliance terms and conditions including; (i) representatives and undertakings of the third party to compliance; (ii) right to audit; and (iii) right to terminate.”
Mary Jones, in an article in this blog entitled “Panalpina’s World Wide Web”, suggested the following language be present in your compliance terms and conditions:
Based on the foregoing experts and the research I have engaged in, I believe that compliance terms and conditions should be stated directly in the document, whether such document is a simple agency or consulting agreement or a joint venture (JV) with several formation documents. The compliance terms and conditions should include representations that in all undertakings the third party will make no payments of money, or anything of value, nor will such be offered, promised or paid, directly or indirectly, to any foreign officials, political parties, party officials, candidates for public or political party office, to influence the acts of such officials, political parties, party officials, or candidates in their official capacity, to induce them to use their influence with a government to obtain or retain business or gain an improper advantage in connection with any business venture or contract in which the company is a participant.
In addition to the above affirmative statements regarding conduct, a commercial contract with a third party should have the following compliance terms and conditions in it.
Many will exclaim, “What an order, I can’t go through with it.” By this they mean that they do not believe that they will be able to get the third party to agree to such compliance terms and conditions. I have found that while it may not be easy, it is relatively simply to get a third party to agree to these, or similar, terms and conditions. One approach to take is that they are not negotiable. When faced with such a position on non-commercial terms many third parties will not fight such a position. There is some flexibility but the DOJ will require the minimum terms and conditions that it has suggested in the various Attachment Cs to the DPAs I have discussed. But the best position I have found is that if a third party agrees with these terms and conditions, they can then use that as a market differentiator from other third parties who have not gone through the life cycle management of a third party as this series has discussed.
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.
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© Thomas R. Fox, 2014
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