Day 17 of One Month to Better 3rd Party Management

One of the issues in any compliance program is the compensation paid to a third party as FCPA exposure arises when companies pay money - either directly or indirectly - to fund bribe payments. In the traditional intermediary scenario, the company funnels money to the agent or consultant, who then passes on some or all of it to the bribe recipient. Often, the payment is disguised as compensation to the intermediary, and some portion is redirected for corrupt purposes. When companies grant distributors uncommonly steep discounts, bribes can result either: 1) because the distributor is instructed by the company to use the excess amounts to fund corrupt payments; or 2) because the distributor pays bribes on its own, without the express direction or implicit suggestion from the company to do so, in an effort to gain some business advantage. The 2012 FCPA Guidance, it noted that common red flags associated with third parties include “unreasonably large discounts to third-party distributors”. The distributor enforcement cases offer lessons to combat the scenario, which is where legitimate companies require assistance. How can risk that distributors present be managed? One mechanism is to install a distributor discount policy and monitoring system tailored to the company’s operational structure. In virtually every business, there exists a range of standard discounts granted to distributors. Under the approach recommended here, discounts within that range may be granted without the need for further investigation, explanation or authorization (absent, of course, some glaring evidence that the distributor intends use even the standard cost/price delta to fund corrupt payments). Where the distributor requests a discount above the standard range, however, the policy should require a legitimate justification. Evaluating and endorsing that justification requires three steps: (1) relevant information about the contemplated elevated discount must be captured and memorialized; (2) requests for elevated discounts should be evaluated in a streamlined fashion, with tiered levels of approval (higher discounts require higher ranking official approval); and (3) elevated discounts are then tracked, along with their requests and authorizations, in order to facilitate auditing, testing and benchmarking. This process also works to more fully operationalize your compliance regime as it requires multiple and increasingly upper levels of management involvement, approval and oversight. Capturing and Memorializing Discount Authorization Requests Through whatever means are most efficient, a discount authorization request (“DAR”) template should be prepared. While remaining mindful of the need to strike a balance between the creation of unnecessary red tape and the need to mitigate risk, the DAR template should be designed to capture a given request and allow for an informed decision about whether it should be granted. Because the specifics of a DAR are critical to evaluating its legitimacy, it is expected that the employee submitting the DAR will provide details about how the request originated (e.g., whether as a request from the distributor or a contemplated offer by the company) as well as explain the legitimate justification for the elevated discount (e.g, volume-based incentive). In addition, the DAR template should be designed to identify gaps in compliance that may otherwise go undetected (e.g., confirmation that the distributor has executed a certification of FCPA compliance). Evaluation and Authorization of DARs Channels should be created to evaluate DARs submitted. The precise structure of that system will depend on several factors, but ideally the goal should be to allow for tiered levels of approval. Usually, three levels of approval are sufficient, but this can expanded or contracted as necessary. Ultimately, the greater the discount contemplated, the more scrutiny the DAR should receive. Factors to be considered in constructing the approval framework include the expected volume of DARs and the current organizational structure. The goal is to ensure that all DARs are vetted in an appropriately thorough fashion without negatively impacting the company’s ability to function efficiently. It also mandates the operationalization of this compliance issue into multiple disciplines within your organization. Tracking of DARs Once the information gathering, review and approval processes are formulated, there must be a system in place to track, record and evaluate information relating to DARs, both approved and denied. This captured data can provide invaluable insight into FCPA compliance and beyond. By tracking the total number of DARs, companies will find themselves better able to determine where and why discounts are increasing, whether the standard discount range should be raised or lowered, and gauge the level of commitment to FCPA compliance within the company (e.g., confirming the existence of a completed and approved DAR is an excellent objective measure for internal audit to perform as part of its evaluation of the company’s FCPA compliance measures). This information, in turn, leaves these companies better equipped to respond to government inquiries down the road. Rethinking approaches to evaluating distributor activities is but one of the ways that the increased number of enforcement actions, 2012 FCPA Guidance and Justice Department’s Evaluation of Corporate Compliance Programs document have provided insight into how the government interprets and enforces the FCPA. This information, in turn, allows companies to get smarter about FCPA compliance. With a manageable amount of forethought, companies who rely on distributors can create, install and maintain systems which allow them to spend fewer resources to more effectively prevent violations. Moreover, these systems generate tangible proof of a company’s genuine commitment to FCPA compliance, by more fully operationalizing this aspect of their compliance program. Many companies have been involved in FCPA enforcement actions because of distributors. This sales side channel does not receive the focus equal to that of commissioned sales agents. Yet it can present an equally large compliance risk. By using this DAR approach, you will have created a well-thought out process which will operationalize your compliance program around distributor compensation, in a manner which documents your decision-making calculus. Three Key Takeaways The creation of well-thought out process which operationalizes your compliance program around distributor compensation, in a manner which documents your decision-making calculus is key. Require multiple levels of approval for an out of range distributor discount. Tracking distributor discounts globally make your company more efficient. This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos 3PM accelerator, the leading platform for third party risk management. To learn more, go to www.opus.com. Learn more about your ad choices. Visit megaphone.fm/adchoices