Life Cycle Management Of Third Parties – Step 4 – The Contract

by Thomas Fox
Contact

Five stepsThis post continues to outline what I believe are the five steps in the life cycle of third party management. Today I will look at Step 4, the contract. However, before we get to the contracting stage a word about what to do with Steps 1-3. You cannot simply obtain the information detailed in these first three steps; you must evaluate the information and show that you have used it in your process. If it is incomplete, it must be completed. If there are Red Flags, which have appeared, these Red Flags must be cleared or you must demonstrate how you will manage the risks identified. In others words you must Document, Document and Document that you have read, synthesized and evaluated the information garnered in Steps 1-3. As the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) continually remind us, a compliance program must be a living, evolving system and not simply a ‘Check-the-Box’ exercise.

After you have completed Steps 1-3 and then evaluated and documented your evaluation, you are ready to move onto to Step 4 – the contract. Obviously any commercial relationship should be governed by the terms and conditions of a written contract. Clearly your commercial terms should be set out in the contract. In the area of commercial terms the FCPA Guidance intones “Additional considerations include payment terms and how those payment terms compare to typical terms in that industry and country, as well as the timing of the third party’s introduction to the business.” This means that you need to understand what the rate of commission is and whether it is reasonable for the services delivered. If the rate is too high, this could be indicia of corruption as high commission rates can create a pool of money to be used to pay bribes. If your company uses a distributor model in its sales side, then it needs to review the discount rates it provides to its distributors to ascertain that the discount rate it warranted.

In addition to the above analysis from the compliance perspective, you should incorporate compliance terms and conditions into your contracts with third parties. I would suggest that you begin with some type of compliance terms and conditions template, which can be used as a starting point for your negotiations. The advantages of such a template are several; they include: (1) the contract language is tested against real events; (2) the contract language assists the company in managing its compliance risks; (3) the contract language fits into a series of related contracts; (4) the contract language is straight-forward to administer and (5) the contract language helps to manage the expectations of both contracting parties regarding anti-bribery and anti-corruption.

What are the compliance terms and conditions that you should include in your commercial contracts with third parties? In the Panalpina Deferred Prosecution Agreement (DPA), Attachment C, Section 12 is found the following language, “Where necessary and appropriate, Panalpina will include standard provisions in agreements, contracts, and renewals thereof with all agents and business partners that are reasonably calculated to prevent violations of the anticorruption laws, which may, depending upon the circumstances, include: (a) anticorruption representations and undertakings relating to compliance with the anticorruption laws; (b) rights to conduct audits of the books and records of the agent or business partner to ensure compliance with the foregoing; and (c) rights to terminate an agent or business partner as a result of any breach of anti-corruption laws, and regulations or representations and undertakings related to such matters.” In the Johnson & Johnson (J&J) DPA, the same language as used in the Panalpina DPA is found in Attachment C, entitled “Corporate Compliance Program”. However, in Attachment D, entitled “Enhanced Compliance Obligations”, the following language is found: “Contracts with such third parties are to include appropriate FCPA compliance terms and conditions including; (i) representatives and undertakings of the third party to compliance; (ii) right to audit; and (iii) right to terminate.”

Mary Jones, in an article in this blog entitled “Panalpina’s World Wide Web”, suggested the following language be present in your compliance terms and conditions:

  • payment mechanisms that comply with this Manual, the FCPA [Foreign Corrupt Practices Act], the UKBA [UK Bribery Act] and other applicable anti-corruption and/or anti-bribery laws during the term of such contract;
  • the counterparty’s obligation to maintain accurate books and records in compliance with the Company’s Policy and Compliance Manual;
  • the counterparty’s obligation to certify on an annual basis that: (i) counterparty has not made, offered, or promised any payment or gift of money or anything of value, directly or indirectly, to any Government Official (or any other person or entity if UK Bribery Act applies) for the purpose of obtaining or retaining business or getting any improper business advantage; and (ii) counterparty has not engaged in any conduct or behavior prohibited by the Code of Conduct, Anti-Corruption Policy and Compliance Manual and other applicable anti-corruption and/or anti-bribery law;
  • the Company’s right to audit the counterparty’s books and records, including, without limitation, any documentation relating to the counterparty’s interaction with any governmental entity (or any entity if UK Bribery Act applies) on behalf of the Company, and the counterparty’s obligation to cooperate fully with any such audit; and
  • remedies (including termination rights) for the failure of the counterparty to comply with the terms of the contract, the Code of Conduct, the Anti-Corruption Policy and Compliance Manual and other applicable anti-corruption and/or anti-bribery law during the term of such contract.

Based on the foregoing experts and the research I have engaged in, I believe that compliance terms and conditions should be stated directly in the document, whether such document is a simple agency or consulting agreement or a joint venture (JV) with several formation documents. The compliance terms and conditions should include representations that in all undertakings the third party will make no payments of money, or anything of value, nor will such be offered, promised or paid, directly or indirectly, to any foreign officials, political parties, party officials, candidates for public or political party office, to influence the acts of such officials, political parties, party officials, or candidates in their official capacity, to induce them to use their influence with a government to obtain or retain business or gain an improper advantage in connection with any business venture or contract in which the company is a participant.

In addition to the above affirmative statements regarding conduct, a commercial contract with a third party should have the following compliance terms and conditions in it.

  • Indemnification: Full indemnification for any FCPA violation, including all costs for the underlying investigation.
  • Cooperation: Require full cooperation with any ethics and compliance investigation, specifically including the review of foreign business partner emails and bank accounts relating to your Company’s use of the foreign business partner.
  • Material Breach of Contract: Any FCPA violation is made a material breach of contract, with no notice and opportunity to cure. Further, such a finding will be the grounds for immediate cessation of all payments.
  • No Sub-Vendors (without approval): The foreign business partner must agree that it will not hire an agent, subcontractor or consultant without the Company’s prior written consent (to be based on adequate due diligence).
  • Audit Rights: An additional key element of a contract between a US Company and a foreign business partner should include the retention of audit rights. These audit rights must exceed the simple audit rights associated with the financial relationship between the parties and must allow a full review of all FCPA related compliance procedures such as those for meeting with foreign governmental officials and compliance related training.
  • Acknowledgment: The foreign business partner should specifically acknowledge the applicability of the FCPA to the business relationship as well as any country or regional anti-corruption or anti-bribery laws, which apply to either the foreign business partner or business relationship.
  • On-going Training: Require that the top management of the foreign business partner and all persons performing services on your behalf shall receive FCPA compliance training.
  • Annual Certification: Require an annual certification stating that the foreign business partner has not engaged in any conduct that violates the FCPA or any applicable laws, nor is it aware of any such conduct.
  • Re-qualification: Require the foreign business partner re-qualify as a business partner at a regular interval of no greater than every three years.

Many will exclaim, “What an order, I can’t go through with it.” By this they mean that they do not believe that they will be able to get the third party to agree to such compliance terms and conditions. I have found that while it may not be easy, it is relatively simply to get a third party to agree to these, or similar, terms and conditions. One approach to take is that they are not negotiable. When faced with such a position on non-commercial terms many third parties will not fight such a position. There is some flexibility but the DOJ will require the minimum terms and conditions that it has suggested in the various Attachment Cs to the DPAs I have discussed. But the best position I have found is that if a third party agrees with these terms and conditions, they can then use that as a market differentiator from other third parties who have not gone through the life cycle management of a third party as this series has discussed.

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.

© Thomas Fox, Compliance Evangelist | Attorney Advertising

Written by:

Thomas Fox
Contact
more
less

Compliance Evangelist 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.