Creative Contracting to Reduce Third-Party Risks (Part III of IV)

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contractMost lawyers are not creative people. After all, there is a reason they went into the law. Lawyers who deal with anti-corruption risks and third parties need to expand their horizons and consider using creative solutions to reduce and minimize risk.

In the anti-corruption compliance arena, many companies are following a standard formula for certifications, representations and warranties. Lawyers involved in these issues have passed around standard clauses they like to use in their agent and distributor contracts.

The “standard” clauses include general representations and warranties that the agent or distributor: (1) has not in the past, and will not in the future violate anti-corruption laws; (2) is not affiliated with any government official (directly or through a close family member); (3) will permit access to the company to conduct audits when needed to ensure compliance with corruption laws and contractual requirements; (4) can be terminated if the company has reason to believe that the agent or distributor has violated (or intends to violate) an anti-corruption law.

All of this is well and good, but I am advocating a more creative approach to reducing risks through contractual provisions. Each situation differs in its facts and circumstances. Depending on the nature of the risk or red flag that is identified, a lawyer’s task is to think outside the box and come up with a certification that addresses that risk.

Here are some examples of what I mean:

1. The potential incriminating fact – Assume that Agent A has been the subject of a foreign government contracting investigation. Press reports relating to the investigation indicate that the foreign agency investigator may have referred the matter for a criminal inquiry or that a lower level official debarred the agent but was eventually overruled and reinstated. In the questionnaire and in a personal interview, Agent A denies there was ever a finding of misconduct by anyone or that it was debarred. The company collects some documentation from Agent A but cannot gain access to all of the internal documents from agency consideration of the matter.contract2

In the absence of corroborating evidence from the documents, the company prepares a representation based on Agent A’s claims/denials. The representation provides two specific protections: (a) if the facts are eventually secured that contradict Agent A, the company may terminate Agent A for misleading the company; and/or (b) if Agent A is alleged to be involved in bribery, the company can demonstrate to the government prosecutors that the company conducted a robust due diligence review of Agent A.

2. The double agent – a government official that partially owns an agent. It is rare but has occurred that foreign government officials are authorized to serve in a foreign government while maintaining a private ownership interests in an agent company/partnership. Assuming that the government official is not in a position to regulate or favor the agent’s contract4business, the company has to design a set of certifications and representations which ensure that the foreign official will not be involved in specific business activities, will not influence, or seek to influence any foreign official through use of his/her position in the foreign government, and will notify the relevant foreign government officials of the specific role of the foreign official in the business.

There are infinite factual situations where creative contract drafting can be used to minimize risk. It is important to address specific red flags and do so with integrity and creativity. Every situation can be addressed –the only question is how and whether such protection is sufficient to outweigh the red flag risk.

Topics:  Anti-Corruption, Chief Compliance Officers, Compliance, Corruption, Risk Management

Published In: General Business Updates, International Trade Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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