Red Flags Are Not Violations

Occasionally, I like to write on topics that fall within the category of the obvious.  This is one of those situations.  It comes up very often when examining third-party agents.

Bribery is a hard crime to prove.  By its nature it is secretive and it requires a meeting of the minds between the briber and the bribee.  Without the testimony of a participant in the bribery scheme it is extremely difficult to prove that a crime has been committed.

In all the focus on third-party agents, it appears that this basic consideration has been lost in the compliance dialogue surrounding the presence of “red flags.”

Let’s start with the basics – the existence of a red flag does not prove that a bribe has been (or will be) committed.  It only means that there is a reasonable cause for concern and further inquiry.  For example, an agent who wishes to be paid in an out of country bank account does not necessarily mean that he or she is trying to evade detection from making a bribe.  Similarly, a large commission for a transaction does not mean that an agent is seeking to bribe a government official. 

Further inquiry does not mean proof of a crime.  The government cannot satisfy its burden by pointing to the existence of red flags as proof that a bribe occurred. 

After a further inquiry is completed, there must be a rational basis for resolving the red flag.  Sometimes this requires an assessment of credibility and motive.  When documenting a red flag analysis, it is important to lay out all the considerations, and to explain why a decision was reached.  A prospective agent may provide a persuasive explanation and the compliance team may credit the agent’s credibility.  That is an important judgment and, so long as it is documented, it will provide important protection against criminal liability.

A red flag, by itself, is never a reason to walk away from a potential business opportunity, so long as the benefits outweigh the risks.  As I have said on many occasions, documenting your analysis and the reasons for your decisions provide an important protection against any claim by the government that your company acted with “corrupt intent.”    It is risky, however, to proceed in the face of a red flag which is hard to resolve, or where the resolution of the red flag is somewhat weak.  This is especially true in situations where a compliance team has identified multiple red flags which are each resolved with relatively weak arguments.      

In this frightening era of enforcement, compliance officers do not need to turn red flags into prima facie FCPA violations.  However, they have to be careful to see the overall picture if multiple red flags appear.  In such situations, caution is important and the documentation of the response, the reasons for resolving the red flags, and the important credibility determinations have to provide comfort before moving forward.

Due diligence is not a science but sometimes the evidence points in one direction.  Whatever determination is made whether to move forward with an agent or not, it is important to remember that an investigation can lead to second-guessing of every decision a compliance team makes.  That is not a fun experience.

You may also like...

2 Responses

  1. Kevin L. Warmack, E.J.D. says:

    This same discussion can be applied to anti-money laundering issues as well. In most AML programs, firms do list out possible red flags that may indicate that there is the possibility of money laundering activity. However, unlike bribery where you need one party to give corroboration of the activity, money laundering can be seen through the activity. But in all cases, there has to be due diligence done of all the parties involved.

  1. June 21, 2012

    […] in Panama. Tom Fox thinks the Justice Department is listening to some of its critics. Mike Volkov states the obvious: Red flags aren’t necessarily […]