Getting due diligence just right

January 01, 1970 by Mark Dunn

Large international organisations are regularly making headlines for all of the wrong reason; including non-compliance with anti-corruption laws like the Foreign Corrupt Practice Act (FCPA) and the UK Bribery Act. Reputational damage aside, these organisations can face substantial financial penalties, trade restrictions, personal liability for staff and other negative consequences that increase the severity of the consequences of non-compliance and inadequate due diligence and compliance procedures. This year, however, enforcement agencies have made it clear that the trend of increasing FCPA prosecutions will not only impact major corporations; small and medium businesses -even individuals- that have global business dealings will not be able to slip under the radar.

How businesses can reduce their risk

In announcing charges for FCPA violations against a Smith & Wesson holding company last summer, Kara Brockmeyer, chief of the SEC Enforcement Division's FCPA Unit, said "This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales. When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating."

While large corporations may take the fines in stride, small and medium companies may find that more difficult. According to a guest column in the Buffalo Law Journal, "In 2013-14, the average 'closing cost' of an FCPA settlement was over $80 million with none of the announced resolutions for less than $1 million." What's more, FCPA settlements have other hidden financial pitfalls—legal and accounting fees incurred to defend against charges, reputational damage and loss of eligibility to take on government contracts.

Clearly, prevention is crucial. Yet like Goldilocks, small and medium companies are challenged to find a middle ground compliance solution; due diligence practices that are not too small to mitigate risk or too big to manage efficiently. Without the same personnel and financial resources available to large corporations, how can these organisations develop a robust due diligence process that is just right?

Create a regulatory compliance check list

To help your business mitigate the risk of non-compliance, begin to address these key risk areas:

  • Third parties - smaller organisations without a strong global footprint may find it preferable to use local agents to do business in foreign countries. To protect against possible violations, companies need to conduct adequate and ongoing supplier screenings. According to the Resource Guide to the Foreign Corrupt Practices Act, 90% of FCPA compliance violations result from third party relationships.
  • Location - developing countries often offer great opportunity for businesses to expand but often have a much higher risk of corruption. Your basic due diligence process should include coverage for these regions to ensure that proper precautions are taken.
  • M&A Activity - when an American business enters into a joint venture or acquisition with a foreign business it can still be at risk of FCPA violations, even for the past events of the acquired organisation. Enhanced due diligence can help you identify potential red flagss before a merger to help eliminate that risk.

With an eye towards the potential FCPA risks and a right sized due diligence process, the trend for FCPA enforcement actions doesn't have to continue to rise.

3 Ways you can apply this information now to help you mitigate your risk

  1. To protect your business and reputation you need to better understand your customers, employees and vendors. Lexis Diligence brings together all the intelligence you need in one place to conduct consistent due diligence and comply with anti-money laundering and anti-bribery regulatory requirements.
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