Myth #5: Top Ten Myths About International Distribution Agreements

Myth: We hope our foreign distributors don’t hand out bribes, but if they do, it’s really not our problem.
Most companies today know that foreign bribery is bad, and may even know it’s illegal. They may have heard of the U.S. Foreign Corrupt Practices Act (FCPA), or the UK Bribery Act, and other similar laws.

But there are plenty of companies that export using distributors that still don’t realize that they can be held accountable for bribes their distributors make. Maybe it’s because it seems far-fetched — how could a completely independent company like your distributor put you at risk for their actions? Or maybe it’s because it seems unlikely your distributor or you will get caught.
Whatever the reason, the truth is: more and more companies are finding themselves subject to FCPA enforcement because of their distributor’s bribes.

One example: A U.S. company was charged with violating the FCPA because its distributor in Brazil was paying bribes to customers. The case settled, with the company paying a large fine. The U.S. government did not claim that the U.S. company actually knew about the distributor bribes. Instead, the claim was that the U.S. company should have known because it did not take the necessary steps to prevent that bribery.

According to the U.S. government, here’s what that company (and every U.S. company) needed to do to avoid liability:

• Conduct thorough due diligence on all distributors.
• Include anti-bribery language in all distributor agreements (which presumes you should have written contracts) that clearly allows you to terminate if you discover bad behavior.
• Train your distributors (as well as your employees who interact with them) regularly on anti-bribery compliance.
• Clearly understand how your products are reaching the end customers and confirm if there are any other intermediaries.
• Prohibit use of sub-distributors, agents, or other intermediaries by your distributor unless you have investigated appropriately and provided written approval.
• Make sure your distributors’ customer margins, and any other compensation you pay them, are reasonable and customary.
• Have controls in place to make sure any red flags are raised and addressed.
• Have your internal audit or finance function monitor this program regularly.
• Document everything that you verified, as well as how any issues or problems were investigated and resolved.

If you have foreign distributors and haven’t at least considered some of these steps, you’re at risk—especially if your distributors sell to local governments.

Remember that government customers in many countries are far more common than in the United States. For example, medicine is socialized in most countries, and that means that the hospitals, doctors, and clinics that your distributor sells to are all government customers.

Don’t believe you might get caught? Most of the companies on the growing list of enforcement cases never believed it would happen to them, either.

Here’s some of the ways they got tripped up:

-The company was for sale, and distributor bribes were found during due diligence.
-Company auditors asked questions and found evidence of bribery.
-Competitors lost a sale because there were “under the table” payments and complained to the authorities.
-Whistle blowers, including concerned current or unhappy former employees and consultants, filed a complaint.

By the way, bribes are still pretty common in many countries. So make sure you get good legal advice when exporting so that you can assess bribery risks and create an anti-corruption program that works for your company.

Doris Nagel is the CEO of Globalocity, and has over 25 years of hands-on experience in strategic partnering, indirect sales channel management, and market entry. She’s a frequent speaker and author, and is currently working on a book on international distributor networks; get a free excerpt from the book here.

Editor’s note: This is the fifth in a series of articles on Debunking The Top Ten Myths About International Distribution Agreements.