7 steps you should take to identify and mitigate compliance risks with foreign intermediaries


Compliance risk foreign intermediaries

Compliance risk foreign intermediaries

Small business owners: are you getting ready to go global? Looking to expand your sales beyond the borders of your home country?

One excellent way for small businesses to enter new markets is through the use of foreign agents or distributors. Market entry through established intermediaries generally requires far less initial investment of time and money than establishing and staffing up a company-owned foreign subsidiary.

Instead of starting from scratch in a new, foreign country, reputable local intermediaries already have established expertise and knowledge of their own markets, your competition and potential customers. They speak the local language, understand local customs and business practices, and presumably appreciate applicable regulatory requirements in their country of operation.

The compliance risks of using intermediaries

At the same time, however, intermediaries create risks, including compliance risks. Companies can be liable if their intermediaries violate laws while acting on their behalf, even without actual knowledge or complicity.

If, for example, a company incorporated in the United States sells widgets to a distributor in Mexico, and the Mexico distributor resells the widgets to sanctioned companies in Cuba or Venezuela, the U.S. company may be liable for a sanctions law violation. Similarly, in the U.S. and UK, if a distributor bribes a foreign official in order to increase sales of your product or move your product through customs, you could be liable for a Foreign Corrupt Practices Act (“FCPA”) or a U.K. Bribery Act 2010 (“UKBA”) violation.

In fact, the vast majority of FCPA enforcement actions involve intermediaries, as this chart below from the Stanford Law School FCPA Clearing House depicts (available here):

The U.S. and UK regulators expect companies to design and implement ethics and compliance program controls, including specific procedures to conduct due diligence of prospective third-party intermediaries, with the goal of reducing anti-corruption and trade control risks associated with those third-parties. The regulators recognize that individual companies have different compliance needs and capabilities depending on their size and risks: small businesses are not expected to have the same compliance programs as large multinational corporations. Nevertheless, even small businesses must conduct some risk-based due diligence before hiring intermediaries abroad.

How your business can reduce compliance risks when working with foreign intermediaries

So, what is a small business to do? Maybe you don’t have the financial resources and in-house expertise to evaluate compliance risks. Don’t panic.

It is always best to hire external counsel or a compliance due diligence provider to help you conduct due diligence and evaluate a potential intermediary prior to engagement. You may be surprised to learn that these services are affordable, and it will be well worth the expense. Intermediaries may present a quick and cheap entry strategy, but you can incur a great deal of expense and reputational damage in the long run if you choose the wrong third party.

Even before you engage an external expert, however, below are a few steps that every company can take on its own to recognize and/or mitigate compliance risks related to foreign intermediaries.

1. Screen the entity or individual in the United States Department of the Treasury’s Office of Foreign Assets Sanctions List search engine, available here. This will help you identify whether the intermediary is itself subject to any specific U.S. sanctions.

This alone is NOT sufficient, however, in part because some entities that do not actually appear on sanctions lists may be subject to sanctions based on the ownership or control of the entity. But if you do get a “hit,” that will be a strong sign that you need more information before you engage that intermediary.

Most other countries have their own sanctions list search engines as well (e.g. the Consolidated Canadian Autonomous Sanctions List is available here).

2. Document your business justification for engaging the intermediary. Understand the role of and need for the third party. Ensure that the intermediary has experience in the line of business for which you will engage the company/individual.

3. If you are considering the engagement of an entity, obtain ownership information from the proposed intermediary so you can screen the owners too.

4. Look out for “red flags,” including an agent’s request for commission payments in cash or request for payments to an off-shore bank account.

5. Document your agreement. Use written contracts that describe the third party relationship and payment terms. Obtain representations and warranties that the intermediary will abide by all applicable laws, including the FCPA, UKBA and trade sanctions laws.

6. Obtain a written certification from the intermediary that it has obeyed and will obey all applicable laws and regulations, including the FCPA, UKBA and trade sanctions laws.

7. If selling your products to an intermediary (e.g. a distributor), obtain a written certification from the intermediary that it will not resell or re-export your product to any sanctioned countries, entities or individuals.

Disclaimer: The opinions expressed in this article are those of the contributing author, and do not necessarily reflect those of the Forum for International Trade Training.

About the author

Author: Jessica Sanderson

Jessica H. Sanderson is Of Counsel at The Volkov Law Group, a premier boutique law firm specializing in corporate compliance, internal investigations, and white-collar defense. Jessica has more than 20 years of legal experience, including in complex civil litigation and regulatory and securities enforcement under the Foreign Corrupt Practices Act, UK Bribery Act and False Claims Act. Jessica has considerable compliance and ethics expertise, having designed, audited and strengthened corporate anti-corruption and export compliance programs. Jessica can be reached at JSanderson@VolkovLaw.com.

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