Foreign Distributor Bribery: Don’t Ask, Don’t Tell?

Should you ask about distributor bribery?  If so, how deep should you dig?

Do you know whether your foreign distributors make payments or do favors to help sell your products locally?  Should you care?  After all,  they are independent companies, right?

If you’re doing business internationally, you know about the U.S. Foreign Corrupt Practices Act (FCPA), and other country anti-bribery laws.   You already understand  that getting business via bribes is a big no-no under these laws.

And yet, anyone who has done business internationally strongly suspects that bribes are still pretty common in many countries.  Large suitcases of cash make for great TV, but are probably not all that common.   More often, the bribery is more subtle — gifts, unusually large “commissions,” lavish entertainment, charitable donations., jobs or internships for relatives, or other favors.  But how well does selling via foreign distributors really isolate you from that?

If you’re a U.S. company and have gotten good advice, you know that the government believes your distributors are an extension of your company.   It’s been 10 years  since the famous GE Invision case, where the U.S. government ruled that U.S. companies are responsible for the bribes of their distributors if they know or have good reason to know about any local bribery — even though distributors are independent companies who re-sell them locally.

Really?  Yes,  if there was any doubt about the U.S. government’s position, the Invision case has since been confirmed and expanded by bribery enforcement cases involving distributors for Eli Lilly in Brazil and Russia, Oracle in India, and Smith & Nephew in Greece.

So maybe you just  shouldn’t ask?

Hardly, according to the government.  To stay clear of bribery liability, they insist that exporters need to:

• conduct thorough due diligence on their distributors, with deeper due diligence needed in markets where corruption is high or the products are sold to government customers;
• clearly document your due diligence;
• have clear anti-bribery language in your distributor agreements;
• ensure your agreements state that no sub-distributors, agents, or other intermediaries can be used by your distributor without your express written approval;
• train all your distributors (as well as employees who interact with them) regularly on anti-bribery requirements;
• clearly understand how your products are reaching the end customers (are there intermediaries involved?);
• make sure all compensation to your distributors is reasonable and customary;
• regularly review your distributors’ margins to make sure they are reasonable and customary;
• have controls in place to make sure any “red flags” are raised and addressed properly; and
• regularly have this whole program monitored by you internal audit or finance function.

Large multinationals have staff and processes in place to implement all of this.  But even they struggle to implement it all consistently.  Most smaller exporters, however,  still do not do any of these things (or do them informally).

Why?  They either don’t know about the risks, doubt that they will ever be tripped up by the FCPA, are getting mixed messages from government agencies, or simply do not have the resources to implement all of these things.

Many Businesses Still Do Not Understand

The full reach of the FCPA or any similar country anti-bribery laws is difficult to understand.  Company managers understand that bribery is bad, but they do not really believe that the actions of their distributors in foreign countries could really cause FCPA problems for them.  And even if you believe it, many of these local companies are not always cooperative, as anyone who has worked with international distributors knows all too well.  If it’s a stretch for you in the U.S. to believe, the cultural gap with many foreign companies is much wider.

The reality is that most companies – even really big ones – have significant holes in their FCPA compliance program.  One FCPA expert believes 95% of companies would find anti-bribery problems if they looked deeply enough.  This seems believable, because several big companies are repeat FCPA offenders, despite spending millions implementing elaborate compliance programs.

Many Companies Think FCPA Enforcement is Unlikely

Small businesses also doubt they will ever be the subject of FCPA enforcement because of their distributors’ actions.

And they are probably correct.  According to the Small Business Administration  and U.S. Census, the largest 1800 companies represent only about .01% of all businesses in the U.S.  To date, virtually all FCPA enforcement has targeted these companies.  The odds of FCPA enforcement for small and medium-sized businesses is small, especially as it relates to foreign distributors.

However, make no mistake — if your number turns up, the government will have no mercy.  The effects on you and your company may be devastating.  Also, many of these cases result from reports by disgruntled former employees, competitors, and even your auditors.

And practically speaking, you’ll need to consider all of this in the event you ever hope to sell your business.  The case that started all this came about because GE asked a lot of questions during the due diligence phase of an acquisition.

Mixed Messages?

Smaller businesses in particular are getting mixed messages from various government agencies.  The Obama administration wanted to double U.S. exports.  A lot of money has been poured into beefed up resources within various government agencies. The idea is to make it easier for smaller companies to export.

But in our many dealings with these organizations, there is not a lot of emphasis placed on counseling companies on the bribery risks related to exporting.  Not surprising — their role is to encourage U.S. exporting, not discourage it.  But when these agencies encourage exports but never talk about corruption enforcement, small wonder that companies find the GE Invision case a real stretch.

So What Should Exporters Do?

First, you should always get good counsel when exporting so that you can balance all the costs and risks from a position of knowledge.  If your company is in a higher risk category (you distribute medical devices, pharma products, defense items, or other items sold to local governments), you may balance these risks differently than a company that sells clothing.

Second, some of the government’s FCPA recommendations also make really good  business sense.  You should do thorough due diligence, because these distributors are the face of your company in local markets.  A bad distributor costs you time, resources, and lost opportunities, is often a pain to get rid of, and may create long-lasting damage in a market.  And while you’re doing the diligence, it’s really not that hard to document your findings.

You should clearly understand every step of your distributor’s go-to-market strategy.  Again, your company and its reputation are at stake.  Plus, you will likely leave money on the table unless you take the time to do this.  It will also help you assess when and how to go direct, if you’re successful.  Or you may find that you’re only dealing with an intermediary, giving you less control, less margin, and potentially affecting the pricing and marketability of your product locally.

Finally, you also should have a well-considered written distribution agreement.  By taking the time to put the key expectations in writing with your distributor, you are much less likely to have disputes later.

What do you think?