When conducting business in a foreign market, agents often serve as intermediaries in interactions with the local government, for example in applying for permits, marketing a company’s services or responding to contract tenders.
TRACE International highlights the importance of obtaining all relevant information that may be able to help companies to conduct thorough due diligence and make informed decisions about appropriate safeguards to put in place when dealing with third parties.
How to identify foreign bribery and corruption red flags
The collection of relevant information assists in the effective identification and interpretation of foreign bribery red flags. This information can be obtained from a variety of sources including public records, media searches, as well as direct from the third party. The whitepaper recommends that collection should include the following (with appropriate modification where the intermediary is an individual rather than a company):
- Business information, registration and literature. This includes name, address and contact information, nature of work performed, regions and markets of operation, qualifications and experience, details regarding payments and financial terms, copies of corporate registration/licensing documents, as well as marketing collaterals.
- Owners and directors. It is important to know who owns or controls the company, and identify beneficial ownership.
- Personnel information. Information about key company personnel such as citizenship, political or government affiliations.
- Government engagements. Which government agencies will the intermediary interact with in performing its services? Does the intermediary perform any other services for or have contracts with any government agency?
- Compliance information. Does the intermediary have effective anti-bribery measures in place?
- Reputational screening. Reviewing the past dealing of intermediaries. Information can be obtained direct from the third party, through media searches or review of court records.
Other key information includes collecting references from other businesses the intermediary has previously engaged with, as well as having the intermediary’s financials independently audited.
What are the key red flags?
The whitepaper identifies a number of red flags which may signify a heightened risk of foreign bribery.
Government links may include:
- An intermediary being directly owned or funded by a government entity, or having members of the Board of Directors subject to government appointment or approval.
- An owner or key employees of the intermediary (or a close relative) holds a government, military or political position
These factors increase the potential for bribery and corruption to occur, and a company needs to be diligent in ensuring that any actions performed on its behalf by the intermediary are in line with the legitimate services it provides.
History and reputation
It is important to consider whether there have been any prior criminal proceedings or convictions against the intermediary or any of its key personnel.
In addition to business references, the local embassy and media reports may help in ascertaining the company’s reputation.
Where engaging with an intermediary that does not have effective anti-bribery policies and procedures in place, there is an increased risk that their employees may engage in activity for which your company could be liable. This same principle extends to any of the third party’s related entities such as subsidiaries, suppliers, subcontractors etc.
Finally, any doubts as to the integrity of the company’s accounting practices raise a serious red flag for bribery risk.
If the intermediary doesn’t have any clear expertise in the relevant industry, or adequate human and financial resources, the question should be asked as to whether they intend to use illicit means to achieve results.
Suspicions may also be triggered by a number of other occurrences, including:
- Extraordinary promises of results are made that are substantially in excess of industry norms
- Unusually high compensation demand – this could signal that some of this compensation is intended to be redirected to corrupt government officials
- An intermediary asks to receive a payment in a separate jurisdiction or in an otherwise unusual fashion
- Was the intermediary recommended by a government official, or a close connection of a government official?
Any gaps in ownership information or concerns about complex structures obscuring beneficial ownership information should be considered a red flag.
Other causes for concern include the lack of an appropriate independent business reference, and any other missing information such as requested documentation.
The whitepaper states that “any falsification or forgery of business registration documents is a red flag of the highest order, and should be considered immediately disqualifying.”
Other misleading information that can be a great cause for concern includes omissions of past illicit behaviour, and failing to identify government affiliations.
An intermediary being outright uncooperative in providing requested information is another key red flag for bribery.
A number of common red flags for foreign bribery exist when dealing with third party intermediaries. These indicators represent a variety of different risks across a range of severity levels. The effective identification and understanding of these risks allows a company to make informed decisions about pursuing the company’s goals and advancing international business engagements, whilst appropriately mitigating the inherent risks.