• Advertise
  • Contact Us
  • About Us
  • Supplier Directory
  • SCB YouTube
  • Login
  • Subscribe
  • Logout
  • My Profile
  • LOGISTICS
    • Air Cargo
    • All Logistics
    • Express/Small Shipments
    • Facility Location Planning
    • Freight Forwarding/Customs Brokerage
    • Global Gateways
    • Global Logistics
    • Last Mile Delivery
    • Logistics Outsourcing
    • LTL/Truckload Services
    • Ocean Transportation
    • Rail & Intermodal
    • Reverse Logistics
    • Service Parts Management
    • Transportation & Distribution
  • TECHNOLOGY
    • All Technology
    • Artificial Intelligence
    • Cloud & On-Demand Systems
    • Data Management (Big Data/IoT/Blockchain)
    • ERP & Enterprise Systems
    • Forecasting & Demand Planning
    • Global Trade Management
    • Inventory Planning/ Optimization
    • Product Lifecycle Management
    • Sales & Operations Planning
    • SC Finance & Revenue Management
    • SC Planning & Optimization
    • Sourcing/Procurement/SRM
    • Supply Chain Visibility
    • Transportation Management
  • GENERAL SCM
    • Business Strategy Alignment
    • Education & Professional Development
    • Global Supply Chain Management
    • Global Trade & Economics
    • HR & Labor Management
    • Quality & Metrics
    • Regulation & Compliance
    • SC Security & Risk Mgmt
    • Supply Chains in Crisis
    • Sustainability & Corporate Social Responsibility
  • WAREHOUSING
    • All Warehouse Services
    • Conveyors & Sortation
    • Lift Trucks & AGVs
    • Order Fulfillment
    • Packaging
    • RFID, Barcode, Mobility & Voice
    • Robotics
    • Warehouse Management Systems
  • INDUSTRIES
    • Aerospace & Defense
    • Apparel
    • Automotive
    • Chemicals & Energy
    • Consumer Packaged Goods
    • E-Commerce/Omni-Channel
    • Food & Beverage
    • Healthcare
    • High-Tech/Electronics
    • Industrial Manufacturing
    • Pharmaceutical/Biotech
    • Retail
  • THINK TANK
  • WEBINARS
    • On-Demand Webinars
    • Upcoming Webinars
    • Webinar Library
  • PODCASTS
  • VIDEOS
  • WHITEPAPERS
Home » Mitigating FCPA Exposure in International Franchise and Distribution Relationships

Mitigating FCPA Exposure in International Franchise and Distribution Relationships

September 5, 2013
Michael E. Burke, Esq., Partner, Arnall Golden Gregory

The FCPA contains both anti-bribery and accounting provisions. The anti-bribery provisions prohibit U.S. persons and businesses, U.S. and foreign public companies listed on stock exchanges in the United States or which are required to file periodic reports with the Securities and Exchange Commission, and certain foreign persons and businesses acting while in the territory of the United States from making corrupt payments to foreign officials to obtain or retain business. The accounting provisions require issuers to make and keep accurate books and records and to devise and maintain an adequate system of internal accounting controls. The U.S. Department of Justice and the Securities and Exchange Commission share enforcement authority under the Act.

The FCPA expressly prohibits corrupt payments made directly to foreign government officials as well as corrupt payments made through third parties or intermediaries. More specifically, the statute prohibits payments made to "any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly," to a foreign official. The fact that a bribe is paid by a third party does not eliminate the poten­tial for criminal or civil FCPA liability for the U.S. principal. The key to the statute's wide jurisdictional reach is in the definition of "knowing": a person's state of mind is "knowing" with respect to conduct, a circumstance, or a result if the person: (i) is aware that he or she is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or (ii) has a firm belief that such circumstance exists or that such result is substantially certain to occur.

The statute's expansive jurisdiction thus provides that principals can be found liable for their distributor's or franchisee's violations of the statute. While there are many reported FCPA investigations and enforcement actions involving international distribution relationships, no investigations or enforcement actions (as of yet) have focused on international franchising relationships.  Franchisors, however, should not believe that they are exempt from the FCPA's antibribery or recordkeeping requirements.  The expansive construction and interpretation of the language "to obtain or retain business or secure an improper business advantage" strongly suggests that a franchisee's improper or illegal activity (as with a distributor) can expose the franchisor to FCPA liability.

Companies using distributors or franchisees outside the United States must conduct risk-based due diligence in order to mitigate their FCPA risk exposure. This diligence includes both an initial review of the potential distributor or franchisee before any agreement is executed and ongoing oversight once the agreement is in place. Further, the diligence should account for the industry, country, size and nature of the transaction, and historical relationship with the distributor or franchisee. Transparency International's Corruption Perception Index is a great resource for understanding which jurisdiction, and which sectors within a jurisdiction, present higher corruption risk. Companies should also catalogue the points at which their business operations interact with non-U.S. government officials"”the greater the number of contact points, the more robust the compliance program should be.

At its most basic level, a compliance program should focus on three principles: (i) understanding the qualifications and associations of a potential distributor or franchisee, including its business reputation, and relationship, if any, with foreign officials: (ii) understanding the business rationale for engaging the potential distributor or franchisee; and (iii) undertaking some form of ongoing monitoring of the distribution or franchise relationship. Effective diligence, even if it fails to detect 100 percent of a distributor's or franchisee's corrupt behavior, will be a mitigating factor in determining a company's penalty for FCPA violations by its distributor or franchisee. An effective FCPA compliance program also requires a mechanism to allow employees and others to report suspected or actual misconduct; importantly, a good compliance program should constantly evolve to reflect a company's operations or changes in relevant law or regulation.

The initial review of each potential franchisee or distributor should seek to answer a number of questions, including: Does the government or any official or instrumentality of the government have any ownership or other financial interest in the distributor or franchisee (keeping in mind the expanding definition of government instrumentality under the FCPA)? Has the distributor or franchisee ever been charged with any sort of crime, fraud or bribery?  Is the distributor or franchisee qualified to perform the duties for which it may be engaged? Does the distributor or franchisee rely heavily on political or government contacts as opposed to knowledgeable staff?  If the initial due diligence review reveals any red flags, the U.S. principal/franchisor should resolve them before entering into any agreement. If there is an FCPA issue down the road, and if a due diligence investigation revealed red flags that were not resolved, or were ignored prior to entering to an agreement, it will be an aggravating factor in assessing the principal/franchisor's liability and/or possible penalty.

U.S. principals and franchisors should include specific FCPA-compliance language in every distribution or franchise agreement. Such language should require the distributor or franchisee to (i) acknowledge the FCPA's parameters and restrictions; (ii) agree to abide by the FCPA's restrictions and requirements, as well as related local law restrictions and requirements; (iii) allow the principal to conduct FCPA compliance-focused audits on the supplier on a periodic basis; (iv) acknowledge, and agree to conform to, the principal's FCPA compliance program; (v) agree to provide semi-annual certifications as to FCPA compliance; and (vi) allow the principal to terminate the agreement immediately and without penalty (if possible under local law) in the event of an FCPA breach by the distributor or franchisee.  In addition, indemnification clauses should require that the distributor or franchisee reimburse the purchaser not just for any "losses," but specifically for the principal's costs of an FCPA investigation.

During the agreement's performance, the U.S. principal/franchisor should monitor its partners by investigating the following questions: Have any unusual payment patterns or financial arrangements emerged? Any payments in cash or cash equivalent? Any payments to an offshore account? Is the compensation rate substantially above the going rate for similar work in a particular country? The principal/franchisor also should follow up on any reasonable rumors that suggest corrupt activity by the distributor or franchisee.

One final suggestion: U.S. principals and franchisors should keep their company's FCPA compliance policy up-to-date, and train those employees who oversee distributors or franchisees or otherwise have an "international" portfolio in FCPA compliance.

Source: Arnall Golden Gregory


Keywords: supply chain management, supply chain risk management, transportation management, supplier risk, supplier liability, Transparency International's Corruption Perception Index

RELATED CONTENT

RELATED VIDEOS

Logistics Logistics Outsourcing Transportation & Distribution Technology Business Strategy Alignment Global Supply Chain Management Regulation & Compliance Supply Chain Security & Risk Mgmt
KEYWORDS Arnall Golden Gregory Business Strategy Alignment Esq. Global Supply Chain Management government and regulatory issues Logistics Logistics Outsourcing Michael E. Burke Regulation & Compliance SC Security & Risk Mgmt supplier liability supplier risk Supply Chain Analysis & Consulting Supply Chain Management Supply Chain Management: Legal Supply Chain Risk Management Technology Transparency International’s Corruption Perception Index Transportation & Distribution Transportation Management
  • Related Articles

    Mitigating Labor/Space and Meeting ROI Hurdles in Warehouse Logistics

    Three Perspectives on Shipper/Carrier Relationships In the Ocean Shipping Industry

    The Value of Good Governance in 3PL Relationships

Michael E. Burke, Esq., Partner, Arnall Golden Gregory

More from this author

Subscribe to our Daily Newsletter!

Timely, incisive articles delivered directly to your inbox.

Popular Stories

  • DOCUMENTS BEARING THE INSIGNIA OF US CUSTOMS AND BORDER PROTECTION LIE ON A TABLE

    New CBP Regs Call for Greater Diligence by Brokers in Reporting Security Breaches

    Freight Forwarding/Customs Brokerage
  • A WORKER IN A WAREHOUSE, SUPERIMPOSED WITH GRAPHICS SHOWING SUPPLY NETWORK

    Enabling Intelligent Visibility With Supply Chain Analytics

    Data Management (Big Data/IoT/Blockchain)
  • GSCMS-Promo.png

    Watch: Introducing the Global Supply Chain Marketing Summit

    Education & Professional Development
  • A HAND TURNS A LARGE, LIGHTED DIAL WITH THE WORD RISK ON IT iStock-NicoElNino-1364371014.jpg

    Measuring KPIs and KRIs for Comprehensive Supplier Performance Management

    Technology
  • DEEPLY CRACKED EARTH UNDER A BLUE CLOUDY SKY

    Why Maritime Supply Chains Must Adapt to Sustainability Regulations

    Ocean Transportation

Digital Edition

Scb nov 2022 sm

2022 Supply Chain Innovator of the Year

VIEW THE LATEST ISSUE

Case Studies

  • New Revenue for Cloud-Based TMS that Embeds Orderful’s Modern EDI Platform

  • Convenience Store Client Maximizes Profit and Improves Customer Service

  • A Digitally Native Footwear Brand Finds Rapid Fulfillment

  • Expanding Apparel Brand Scales Seamlessly with E-Commerce Technology

  • How a Global LSP Scaled its Security Program and Won More Business

Visit Our Sponsors

Orderful Yang Ming Alithya
Barcoding Blue Yonder BNSF Logistics
CoEnterprise Data Capture Deposco
E2open GAINSystems Generix
Geodis GEP GreyOrange
Here Honeywell Intelligrated IFM
Infor Inmar Keelvar
Kinaxis Korber Lean Solutions Group 2H
Liberty SBF Locus Robotics Logility
LogistiVIEW Lucas Systems MCA Connect
MPO Nvidia Old Dominion
OpenText ORTEC Overhaul
Parsyl PMMI QIMA
Redwood Logistics Ryder E-commerce by Whiplash Saddle Creek Logistics
Schneider Dedicated Setlog Holding AG Ship4WD
Shipwell Tecsys TGW Systems
Thomson Reuters Tive Trailer Bridge
Vecna Robotics Verity
Verusen
  • More From SCB
    • Featured Content
    • Video Library
    • Think Tank Blog
    • SupplyChainBrain Podcast
    • Whitepapers
    • On-Demand Webinars
    • Upcoming Webinars
  • Digital Offerings
    • Digital Issue
    • Subscribe
    • Manage Your Subscription
    • Newsletters
  • Resources
    • Events Calendar
    • SCB's Great Supply Chain Partners
    • Supplier Directory
    • Case Study Showcase
    • Supply Chain Innovation Awards
    • 100 Great Partners Form
  • SCB Corporate
    • Advertise on SCB.COM
    • About Us
    • Privacy Policy
    • Contact Us
    • Data Sharing Opt-Out

All content copyright ©2023 Keller International Publishing Corp All rights reserved. No reproduction, transmission or display is permitted without the written permissions of Keller International Publishing Corp

Design, CMS, Hosting & Web Development :: ePublishing