The Foreign Corrupt Practices Act (FCPA) world is littered with cases involving freight forwarders, brokers and agents in the shipping and express delivery arena. Both the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have aggressively pursued third party business relationships where bribery and corruption have been found. This is particularly true where companies are required to deliver goods into a foreign country through the assistance of a freight forwarder or express delivery service. There are several major risk points. These include:
How can a company respond to protect itself or at least reduce its potential FCPA risk with regarding to a logistics company, freight forwarder or express delivery company? Obviously having a thorough risk assessment program and due diligence program are critical. After determining risk, move to perform due diligence based upon this risk. However, there are some general questions that you should ask, both internally and to your prospective vendor.
After you ask some of these questions, investigate your risks and evaluate them; you should incorporate these findings into a contract with appropriate FPCA compliance terms and conditions. This contract should announce to your to third party freight forwarder/express supplier of your expectations regarding their compliance program. Your contract should also allow for management of the compliance relationship. Your contract should require training and certification by verified provider or by your company. Your company’s Relationship Manager should ensure the third party’s compliance with your company’s anti-bribery compliance program.
James Min, Vice President, Int'l Trade Law & Global Head of Trade Law Practice Group at DP-DHL Legal Department, developed a risk matrix for the freight forwarders/express delivery industry. In this Min analyzes risks by multiplying factors noted herein and thus scoring. This model shows that location should not be the sole criteria for risk. The factors in the Min Model are the performance of your company’s customers clearance brokers and how far that performance varies from the norm your company normally receives. In the below chart, +1.00 equals average clearance time. >1.0 equals faster than average and <1 means slower than average.
The Min Model
Country | TI CPI | Customs Clearance Performance | Variance from Average Performance | Risk Score | Risk Rank |
A | 55 | .93 | 1.21 | 61.9 | 1 |
B | 20 | .76 | 0.89 | 13.5 | 3 |
C | 54 | .29 | 1.00 | 15.6 | 2 |
D | 88 | .12 | 0.7. | 7.39 | 4 |
The key in this approach is how often the Customs Broker/Express Delivery Service varies above the average for customs clearance times. If the percentage of customs clearance performance is so great that your vendors variance is above 100% most of the time, this could be a Red Flag that bribery or corruption is involved. This should lead to further investigation, due diligence, or asking of questions of your vendor.
Almost every business transaction engaged in by a freight forwarder, express delivery service or customs broker, outside the US involves a foreign governmental official. Every time your company sends raw materials into, or brings them out of, a country there is an interaction with a foreign governmental official in the form of a Customs Official. Every customs transaction involves a payment to a foreign government and every transaction involves some form of a foreign governmental regulatory process. While the individual payment per transaction can be small, the amount of total transactions can be quite high, if a large volume of goods are being imported into a foreign country.
Conversely interacting with international tax authorities can present problems similar to those with customs officials, but the stakes can often be much higher since tax transactions may be less in frequency but higher in financial risk. These types of risks include the valuation of raw materials for VAT purposes before such materials are incorporated into a final product, or the lack of segregation between goods to be sold on the foreign country’s domestic market as opposed to those which may be shipped through a free trade zone for sale outside that country’s domestic market.
If you utilize the services of a third party for any of the transactions listed above, that company’s actions will go a long way in determining your company’s FCPA liability. You must have a thoughtful process and document that process.
Three Key Takeaways
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos 3PM accelerator, the leading platform for third party risk management. To learn more, go to www.opus.com.