Corporate Compliance Insights: Risky Business

The following article was originally published in Corporate Compliance Insights on November 21, 2016. 

There has been increasing use of offshore jurisdictions by third-party vendors to elude taxes and hide illegal or unethical conduct, including bribes and kickbacks. Third parties include joint-venture partners, independent sales agents, distributors, manufacturers, customs agents, logistics and transportation companies and others. Regardless of their designations, use of shell corporations in offshore locations by these third parties, especially by vendors based in Asia, has skyrocketed in recent years.

Offshore jurisdictions such as the British Virgin Islands, Seychelles, Samoa, Panama and Belize, to name just a few, have been used for many years as tax havens. These offshore tax havens are no longer just used by multibillion-dollar companies, financial institutions, hedge funds or the ultrawealthy. Many small companies are now using these offshore tax havens to hide revenue, but another primary purpose is now to disguise the identities of a company’s owners, providing ample opportunities for kickback and bribery schemes to flourish. When a vendor has offshore ties, be aware of the multiple possibilities for compliance problems arising.

In recent years there have been a disproportionate number of vendors based in Hong Kong, China, the Philippines, Singapore, Malaysia, Russia, Brazil and Indonesia, among other nations, using shell corporations for illegal purposes in offshore locations.

The beneficial owners behind offshore entities are often employees, hiding their ownership of a vendor. Often a shell company may be disguising the fact that relatives and friends of an employee are obtaining business improperly and often at much higher than market rates. The offshore entity serves to hide kickback or bribery schemes in most instances.  In many cases, vendor fraud such as this costs organizations as much as 10 to 20 percent of the amount of the contract.

When government officials are involved in third-party vendor schemes, the Foreign Corrupt Practices Act (FCPA), and other laws relating to bribery, can create substantial legal consequences for global organizations. Your company may be unknowingly dealing with a politically-exposed person who is receiving substantial bribes through shell vendors.

Here are three steps your organization can take to address and prevent third-party vendor fraud that may create FCPA or other compliance risks:
  1. Require vendors to identify any person that has any financial interest in their business.  This should include the names of individuals that are shareholders of any business entity that has a financial interest in the third party. Verify the information you are provided.
  2. Conduct appropriate risk-based due diligence on vendors and shareholders, including, but not limited to, reviews of watch lists, corporate registration documents, litigation matters, FCPA investigations and other corruption cases, media and more. Always perform site visits to confirm the activities of the third-party vendor. If the vendor is registered offshore, do more, including interviews of knowledgeable sources.
  3. Provide on-line and in-person training of key employees and third party vendors regarding your organization’s code of ethics and anti-bribery/FCPA compliance program. This should be done on a regular and continuing basis.

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