Foreign-Country Contacts Fraught with Corruption Risks

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By Che Odom

April 29 — Corporate counsel and compliance officers are increasingly concerned over their companies' exposure to corruption risks while operating in a foreign country.

According to a recent survey by consultant AlixPartners LLC, the perceived threat of operating in jurisdictions such as Africa, Russia and the Middle East is growing for in-house counsel and chief compliance officers. The respondents also weren't optimistic about whether the risks in these areas will abate any time soon.

However, corporate attorneys told Bloomberg BNA that companies may find trustworthy contacts in foreign jurisdictions if they consult businesses, trade associations and respected law firms that are based in those countries.

“Finding the right advisers can be easier said than done, and I have certainly encountered lawyers in other jurisdictions who wouldn’t think twice about advising unethical behavior to achieve a legal or business objective,” Peter Bragdon, general counsel of Columbia Sportswear Co., told Bloomberg BNA.

“We work hard to avoid advisers like that, but that is a sign of how deeply ingrained corruption can be in some countries.”

Local Consultants

One area fraught with danger is the use of local consultants in negotiating contracts, navigating law and procedures and acting as interpreters, George Foster, a professor at Lewis & Clark Law School who focuses on international business, told Bloomberg BNA.

For example, when a local consultant is paid to negotiate a contract, “there may be a risk that the consultant will pass all or part of that compensation on to a foreign official in order to help secure the contract,” Foster said.

The Foreign Corrupt Practices Act, which bars the bribery of foreign officials, and other anti-corruption laws are designed to cover such indirect bribery, so the company would be held responsible, Foster said.

As a first step, businesses should avoid influence peddlers unequipped to provide bona fide services but used simply because of their contacts with government officials, Foster said. Such firms may use improper means to influence local decision-making processes, he added.

Respected Attorneys

While finding a trustworthy local contact can be difficult, respected local law firms may be good sources, Foster said. “Local lawyers may be helpful in the negotiations in their own right or they may have contacts with reliable, knowledgeable local consultants.”

Vet local consultants and require them to commit in writing not to engage in corrupt activities, Foster said. Companies also should avoid paying local consultants more than market value for their services and “avoid compensating them in a way that will effectively” encourage them to engage in bribery, he said.

Screening

Jo S. Levy, chief compliance officer of Intel Corp., told Bloomberg BNA that businesses may find it necessary to have compliance personnel meet directly with third parties to conduct effective due diligence.

Explaining what is expected of third parties from the beginning is important, “particularly where local customs may include conduct that would violate a company's ethical standards,” Levy said.

“No system is foolproof, however, so it's also important to continue to monitor activities throughout the engagement,” she warned.

Monitoring Key

Monitoring should be more robust at the beginning of the relationship until trust and confidence have been established, said Randy Stephens, a vice president at advisory services provider NAVEX Global.

“The due diligence and monitoring should be risk appropriate—more for contacts who are operating in countries or with responsibilities where bribery and corruption are more prevalent,” Stephens told Bloomberg BNA.

Strong compliance programs and due diligence can help a company identify unacceptably risky parties before engaging them, Stephens said. Training, awareness and controls also make it more likely that the third party will understand and comply with the laws and the company's policies, he said.

“If all of this fails and the third party still turns out to be corrupt, the strong compliance program and documented proof of reasonable, risk-based due diligence may significantly reduce any liability, penalties or sanctions,” he said.

Size Advantage

Smaller companies may be at a disadvantage when it comes to establishing trustworthy contacts, Bragdon said.

Employees at Columbia Sportswear, an Oregon-based company with a market capitalization of $4 billion, are experienced at working in challenging locations around the world and developing a network of professional advisers, Bragdon continued.

The company also has a broad network of contacts worldwide that can provide referrals and “honest feedback about service providers in international markets,” Bragdon said. Moreover, Bragdon said he seeks informal guidance from general counsel at other companies.

“Seeking input from multiple parties, and having some history in many locations, it is much easier to triangulate and get a sense of who we should be working with,” he said. “That, along with our effort to understand the cultural challenges we may deal with in a particular location, go a long way toward helping me sleep at night.”

Such advantages may not be available to a start-up or a company trying to break into the international markets, he said.

“Anyone who thinks that they can choose an adviser out of the phone book in challenging locations—the way they might in the U.S.—is on an incredibly risky path,” he said.

To contact the reporter on this story: Che Odom in Washington at codom@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

For More Information

The AlixPartners survey is available at http://src.bna.com/eyO.