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Anti-Corruption Laws May Feed on the Food and Beverage Industry
by Gene Cahill
How much do you know about your overseas and cross-border business “partners?”
Due diligence and internal controls are more critical in light of increased regulatory enforcement of anti-corruption laws here and abroad. This is especially true given the global reach of the food and beverage industry. While you might not invite third-party partners over for dinner, you and your organization will benefit greatly from knowing who these business are and how they operate.
According to the USDA, the value of U.S. food imports has more than doubled since 1999. With this expansion comes risk, particularly in new markets and developing countries. Food safety and an uninterrupted supply chain are the greatest concern, but the risks of not complying with anti-corruption laws are increasing, and the associated costs are high. Without a defensible anti-corruption position, your company is vulnerable.
The Foreign Corrupt Practices Act, the U.K. Bribery Act, and other anti-corruption statutes and local laws are affecting food importers and companies doing business abroad, as regulators hold companies liable for the actions of third parties.
Corruption prosecution, which disrupts business operations, erodes brands, and damages reputations, is a long and challenging process for any company. Corporations can be fined up to $2 million, or twice the gain on a contract, for a single FCPA violation.
Individuals can also face significant fines, imprisonment, or both. U.S. enforcement agencies assessed approximately $1.7 billion dollars in FCPA fines in 2010.
The penalties are particularly steep for organizations and individuals convicted of what the U.S. Justice Department calls “willful blindness”—not doing what they should have and ignoring fraud that has infiltrated a global supply chain.
Under FCPA, companies and individuals, including officers, directors, shareholders, employees, or agents of a U.S. company, may carry liability for the actions of agents, consultants, and distributors. In addition, they’re liable for subsidiary actions.
So what are third parties really doing on your behalf? Are you willing to bet your organization’s reputation and your career on it?
Anti-Corruption Laws and Statutes
Bribery among third-party market participants is widespread and takes many forms. Cash, product, and grease payments are not uncommon. We see this from a wave of third parties who are retained for their knowledge of local governments, transportation entities, and custom officials. These added touch points increase the risk of corruption, potentially exposing U.S. firms to unexpected liability.
Foreign Corrupt Practices Act
The United States Foreign Corrupt Practices Act was enacted more than 30 years ago, but the Justice Department’s FCPA team recently and very publicly stepped up its criminal enforcement and prosecution of violators. Companies whose stock is traded on a U.S. exchange may also expect a visit from the Securities and Exchange Commission if under investigation.
FCPA prohibits corrupt or improper payments to foreign officials to obtain or retain business. A corrupt payment or bribe could be cash or anything of value, such as gifts, entertainment, travel, or loans. Any interaction with foreign officials could present corruption risks. Though this becomes clearer if the action is found to have “corrupt intent” to influence the recipient, a company might be violating the FCPA simply by paying for a round of golf and dinner.
FCPA also requires U.S. registrants to keep books and records that accurately reflect business transactions and to maintain internal controls.
You must document the basis of expenditures. If there is no documented explanation, the assumption will be that the payments were made for corrupt purposes.
Here’s a common scenario: A company is establishing a facility to process raw materials for shipment to the U.S. The land is currently zoned for agricultural use, so setting up a processing plant requires converting land to another use. It’s not unusual for third-party agents to exchange cash bribes to facilitate rezoning. Agents may improperly record expenses to generate cash that is used to pay a “zoning consultant” who will assist in transferring the land from agricultural to food processing facility status. The duties of the zoning consultant are vague, including any and all activity to ensure the land is rezoned. In conducting due diligence for clients, we’ve seen this transpire even within long-standing agent relationships, to the great surprise of the companies involved. You may not have visibility into this corrupt activity from your corporate office, but to U.S. regulators and overseas prosecutors, that’s no excuse.
While you might not invite third-party partners over for dinner, you and your organization will benefit greatly from knowing who these business are and how they operate.
The Travel Act makes it a crime to engage in any interstate or foreign travel or to use any mail or facility in foreign or interstate travel with the intent to “carry on” or “facilitate” any “unlawful activity.” Further, “unlawful activity” is defined to include organized-crime activity and “bribery... in violation of the law of the State in which committed or of the United States.” Under the Travel Act, the crime is not the bribe itself but the international travel, wire transfer, or phone call utilized to execute the bribe. The Travel Act only applies if state or federal law would make the bribe illegal. Assessing this is usually a straightforward process because the bribe may often be a violation of the FCPA.
U.K. Bribery Act
Enacted on July 1, 2011, the U.K. Bribery Act deems it illegal to bribe any person, to accept a bribe, or, for commercial organizations, to fail to prevent bribery. The act applies to all companies registered in the U.K., companies that have any part of their operations in the U.K., or those that employ citizens of the U.K. Penalties include unlimited fines for companies and imprisonment for up to 10 years for individuals.
Dodd-Frank Act Whistleblower Incentives
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established a whistleblower program that requires the SEC to pay an incentive for information about securities violations. If the lead materializes into an investigation and fines, it can be like winning the lottery for the whistleblower.
This is a real and significant risk for companies, and both the number of reports and the quality of complaints is increasing. Since the whistleblower provision of the Dodd-Frank Act was implemented, the SEC files allegations of FCPA offenses every day.
When violations are recorded, FCPA enforcement agencies seek other companies that may look or act in a similar way. In addition, organizations sometimes receive reduced judgments for voluntary disclosure of possible misconduct and cooperating with regulators on related investigations of competitors and their clients. In recent years, enforcement agencies have conducted industry sweeps, investigating entire industries for possible cause following allegations of wrongdoing by one or several other competitors.
In late July 2012, Reuters reported that U.S. enforcement agencies were considering launching a wide-ranging examination of the retail industry for FCPA violations after Walmart and other retailers came forth with their own potential offenses. A bribery scandal at Walmart’s operations in Mexico is the subject of investigations by the DOJ and SEC.
An FCPA probe is mentioned in The Wall Street Journal nearly every week. For public companies, the enforcement actions play out in the press, but private companies are just as likely to come under regulatory review.
In 2011, Tyson Foods, Inc., the world’s largest beef, pork, and chicken processor, resolved criminal and civil FCPA charges stemming from the alleged bribery of Mexican government veterinarians by Tyson’s wholly owned Mexican subsidiary.
Tyson de Mexico allegedly made $90,000 in illicit payments to two Mexican state-employed veterinarians who certified Tyson de Mexico’s products for export. The alleged payments were initially disguised on the company payroll as “salaries” paid to the wives of the veterinarians.
To resolve the civil charges, Tyson agreed to disgorge to the SEC $1.2 million in ill-gotten profits and prejudgment interest. The company resolved its criminal charges through a two-year deferred prosecution agreement, pursuant to which Tyson agreed to pay a $4 million criminal penalty. Tyson also agreed to report to the DOJ semi-annually concerning its compliance program. When announcing the settlement, Assistant Attorney General Lanny Breuer noted Tyson’s voluntary disclosure of the misconduct, cooperation with regulators, and remedial measures.
Food safety and an uninterrupted supply chain are the greatest concern, but the risks of not complying with anti-corruption laws are increasing, and the associated costs are high. Without a defensible anti-corruption position, your company is vulnerable.
Also last year, the Ball Corporation, which manufactures metal packaging for food, beverages, and household products, settled FCPA administrative charges with the SEC by paying a $300,000 penalty.
Ball’s Argentine subsidiary, Formametal S.A., allegedly made improper payments prior to being acquired by Ball Corporation, and the parent allegedly failed to implement internal controls to prevent further payments. Senior Formametal managers, including its president, allegedly knew about the bribes, which were disguised in the company’s books and records as legitimate customs fees and business expenses.
Although the SEC noted that Ball Corporation did not promptly terminate the responsible employees when company accountants learned about the improper payments in February 2007, it assessed only a $300,000 fine because of the company’s other remedial efforts, voluntary disclosure of the misconduct, and cooperation in connection with a related investigation.
Understand Your Risk
What types of activities are you engaged in? Corruption is more difficult to detect in a mergers and acquisitions context, especially if due diligence is rushed. Certain undertakings are riskier depending on the jurisdiction. Setting up a plant, using advanced technologies, and relying on third parties to source materials can increase your risk profile. Every country has different supply chain and freight forwarding risks.
Certain countries may be more vulnerable to fraud and corruption or more tolerant of their companies engaging in fraud and corruption. Your non-U.S. operations may be dominated by individuals with a limited understanding of U.S. laws and norms. There’s the possibility of weaker internal controls, non-integrated financial reporting systems, inadequate monitoring, and infrequent audits. Your foreign business partners (e.g., agents, distributors, joint venture partners) may not realize they are subject to U.S. regulations, and local confidentiality and privacy rules may make it difficult to perform thorough due diligence on them.
Assess these risks, and address the highest priorities first. Focus on what you need to do to create or strengthen a defensible position.
Although corruption happens everywhere, higher risk geographies include Latin and South America, specifically Mexico and Brazil; India; China; Russia; and Eastern Europe. In Latin America, it’s all about personal relationships and who you know—personal favors are customary. Tax-avoidance pressure can lead to off-book transactions. Mexico’s drug cartels have infiltrated the business community, and corruption issues are present among local governments.
In certain locations, the definition of “government official” is quite different than in the U.S. Domestically, “government official” conjures an image of a politician or legislator, but in heavily regulated, bureaucratic China, nearly anyone can carry that title. Bribes may appear in books and recorded as “Extra Amount” and “Special Arrangement” fees.
Organized crime has infiltrated legitimate businesses in Russia. In addition, gifts to officials are allowed under Russian civil code. The lack of transparency in business transactions creates a reliance on third-party agents. In Russia, a country that is new to the market economy, a Wild West environment exists.
There’s one bit of good news: Regulators for most countries are headed in a cooperative direction. Even China and Russia are beginning to work with the Organisation for Economic Co-operation and Development in their commitment to fight corruption.
What to Do Now
Part of the challenge of staying on top of corruption threats involves seeing and knowing. In “The Anti-Corruption Handbook: How to Protect Your Business in the Global Marketplace,” author Bill Olsen says start with simple questions:
- Where are we doing business?
- Who are we doing business with?
- How are we conducting our business?
Olsen is a principal and leader of the Forensic, Investigation, and Dispute Services practice and National Practice leader for Global Investigation and Anti-Corruption Services for the U.S. at Grant Thornton LLC.
Of course, there are costs associated with implementing compliance programs. What you decide to do depends not only on your global activities and your company’s risk tolerance but also on its mission and values.
How much of the following have you implemented?
- Assessment of foreign corruption risk;
- Written policies, procedures, and certification protocols clearly articulated in local languages;
- Compliance testing, reporting systems, and whistleblower hotlines;
- System of internal controls and accurate books and records;
- Independent audits to ensure implementation of the compliance code;
- Zero tolerance policy for employees engaged in corrupt activity;
- Anti-corruption language in every new contract with third parties;
- Due diligence pre-retention/post-retention oversight of agents and business partners; and
- Senior management oversight and reporting.
You must be proactive in putting measures in place for forward-looking FCPA and U.K. Bribery Act compliance programs. If a rogue employee or business partner acts out of turn and the DOJ or other enforcement agency requests a review or issues a subpoena, you’ll have a trail of standards and reporting as defense.
The corrupt practices that may be infiltrating your supply chain are a risk to your revenue. With import growth comes more regulation and better enforcement of the already broad-reaching FCPA and U.K. Bribery Act. You must understand the risks to your company and take steps to minimize or eliminate them. The DOJ has come down hard on individuals who put their heads in the sand. If you don’t have the infrastructure in place to combat corruption, you’re not prepared.
Gene Cahill is a director in the Forensic, Investigative & Dispute Services practice in the Chicago office of Grant Thornton. He has 20 years of accounting and consulting experience. He can be reached at 312-602-8103 or firstname.lastname@example.org.