Drilling Down On Due Diligence: Raising The Bar

by Michael Volkov
Contact

due diligenceI am sure Justice Department and Securities and Exchange Commission lawyers sometimes sit back and marvel at the world they have helped create – Companies are devoting more resources to the due diligence process for screening third parties.  Companies are building due diligence screening procedures and more sophisticated protocols to minimize risk.  The message has come through loud and clear – conduct due diligence and control your third-party risk.

In building these due diligence systems, companies are facing a number of interesting issues.  It is a sign of the times that these are the issues that are bubbling up in the third-party compliance area.  Here are a few of the most significant questions:

1.  How should a company define and apply the term “third-party intermediary”?

A company has to have a clear definition of third parties subject to due diligence review.  Companies deal with a variety of third parties, including traditional commercial sales agents who develop business opportunities with foreign government customers.  The term should apply to a variety of parties such as distributors, contractors and sub-contractors, customs agents and freight forwarders, lobbyists, lawyers, tax professionals, advertising agents, event organizers, Visa agents, consultants and other professionals.  Not all of these categories carry the same level of risk since they may vary in the number and nature of foreign government interactions.

Many managers and employees may not be familiar with the scope of the third party definition used in a company policy.  It is important to communicate the broad application of the policy to ensure that the presumption when dealing with a potential third party is to run them through the due diligence program.

2. How should a company assess risk for an initial due diligence?

The key is to keep your eye on the ball – it is easy to categorize someone as a “third party” falling under the third-party due diligence policy, but it is more important to focus on the nature and number of foreign official interactions.  A risk assessment will focus on this issue and should give a company a way to rank most third parties, extending even to risk ranking of a whole category of third parties (e.g. directors of local subsidiaries from the local country).due diligence drill

The problem in the initial assessment phase is the absence of any track record of performance or data.  The company is starting from scratch and has limited information.  But you have to start somewhere and the company may be wise to conduct a more comprehensive due diligence then necessary at renewal or when dealing with a third-party with whom the company has had prior relations.

3.  How do I apply due diligence requirements to suppliers/vendors?

One of the most intractable issues is the application of due diligence to suppliers/vendors.  Many companies have thousands and thousands of suppliers/vendors.  There are two basic questions which can be applied to the list to remove several of the suppliers/vendors from the due diligence process.

First, there is a definitional issue.  Not all suppliers/vendors are created equal when it comes to FCPA liability.  What do I mean?

If a supplier/vendor provides the company with goods or services, which the company in turn uses to provide its product, the risk may be lower.  For example, the risk to the company may be that the supplier/vendor would bribe a customs official to allow delivery of the goods to the company.  It is not clear that the company, the purchaser of the goods duediligence10and services, would be liable for the bribe paid by the vendor/supplier since it is unlikely that the specific bribe can be tied to the benefit of the purchasing company since the bribing supplier/vendor likely has a number of customers who would benefit from the bribe.  Further, the transaction does not fit under the traditional third-party representative model under the FCPA statute.  The purchasing company, however, would face reputational risks for associating with a company engaged in bribery.

Second, a number of suppliers/vendors can be removed from due diligence review based on annual revenues.  The company should establish a minimum threshold below which due diligence may not be applied.  Moreover, a review of active suppliers/vendors is likely to result in the removal of a number of suppliers/vendors who are no longer active.

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

Written by:

Michael Volkov
Contact
more
less

The Volkov Law Group on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.