Compliance officers are trained to spot risks.  They have an eagle eye and keen sensitivity.  In some cases they have to overcome inaccurate designations – my favorite is a “PEP,” a politically exposed person.  I sometimes hear the compliance equivalent of an “Oh, no, we can’t do business with him or her – he or she is a PEP.”  Of course, we all know that the designation of an individual as a PEP does not preclude potential business but is a moniker for heightened scrutiny, and rightfully so.

In many countries, however, companies may consider doing business with a foreign official, particularly with a third-party candidate that may include a foreign official owner.  Some may consider that the kiss of death – I say such a situation has to be navigated and analyzed carefully.

In many countries, government officials may permeate the economy.  Sometimes existing government officials are permitted to engage in commercial activities outside of their government positions.  Talk about a high-risk situation.  Luckily there are ways to move forward in such arrangements, subject to significant controls that need to be put in place.

Assuming that a foreign official has an ownership interest in the third-party candidate, there are a number of questions that need to be answered (and these are only just a few):

• What is the nature and amount of the foreign official’s involvement and/or ownership interest in the third-party?
• Will the foreign official have any involvement in the day-to-day operation of the third-party?
• What is the foreign official’s interest in the third-party?
• Will the third-party interact with the foreign government on behalf of the company, and if so, with which government functions and for what purpose(s)?
• Does the third-party have a reason or incentive to ensure that the foreign government favors your company
• What compensation arrangement does the third-party desire and how shall such payments be made to the third-party?

The FCPA Guidance at Page 64 addresses this specific scenario in a specific hypothetical.

Company A retains a local distributor to sell Company A’s products to the Ministry of Immigration.  The distributor seeks a discount for the price it pays Company A greater than the standard discount.  In addition, the distributor indicated that the Ministry’s procurement officials responsible for awarding the contract have expressed a strong preference for including a particular local company (Local Partner) in the transaction as a subcontractor of Company A to perform installation, training, and other services that would normally have been performed by Distributor or Company A. According to Distributor, the Ministry has a solid working relationship with Local Partner, and it would cause less disruption for Local Partner to perform most of the on-site work at the Ministry. One of the principals (Principal 1) of the Local Partner is an official in another government ministry.

In explaining the compliance consideration in this scenario, the FCPA Guidance notes (emphasis added), with regard to the specific issue of the participation of a government ministry official in the Local Partner that:

Company A should carefully scrutinize the relationship among Local Partner, Distributor, and Ministry of Immigration officials. While there is nothing inherently illegal about contracting with a third-party that is recommended by the end-user, or even hiring a government official to perform legitimate services on a transaction unrelated to his or her government job, these facts raise additional red flags that warrant significant scrutiny. Among other things, Company A would be well-advised to require Principal 1 to verify that he will have no role in the Ministry of Immigration’s decision to award the contract to Company A, notify the Ministry of Immigration and his own ministry of his proposed involvement in the transaction, and certify that he will abide by the FCPA and other anti-corruption laws and that his involvement in the transaction is permitted under local law.

Assuming that the red flags can be adequately addressed with the foreign official owner situation, a company has to ensure that it confirms and secures appropriate representations, warranties and certifications to mitigate the risks, including, at a minimum: (1) foreign official assurance that he/she will not be involved in day-to-day operation of business (since foreign official is likely to have government responsibilities); (2) foreign official certification that he/she has no relationship – professional, personal or familial – with any government official that will be used directly or indirectly to award any business to the company or otherwise used to secure any business advantage or otherwise used to obtain or retain any business; (3) foreign official shall notify any Ministry agency or part of any government with which the company shall interact, directly or indirectly, of the foreign official’s ownership interest in and involvement with the company; and (4) the foreign official’s involvement with the company does not violate local law.