Third Parties Increasing Use of Off-Shore Havens

by KLINK
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Three Steps to Take to Reduce Risk

In this compliance update we analyze the increasing use of off-shore jurisdictions by third party vendors to elude taxes and hide illegal or unethical conduct, including bribes and kickbacks.    For over fifteen years, Klink & Co. has annually conducted thousands of due diligence investigations on vendors providing a wide range of services and products to our global clients.  Third parties include joint-venture partners, independent sales agents, distributors, manufacturers, customs agents, logistics and transportations companies, and others.  Regardless of their designations, use of shell corporations in off-shore locations by these third parties, especially by Asian-based vendors, has skyrocketed in recent years.   

Off-shore 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 off-shore tax havens are no longer just used by multi-billion dollar companies, financial institutions, hedge funds or the ultra-wealthy.   Many small companies are now using these off-shore 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 off-shore ties, please be aware of the multiple possibilities of compliance problems arising.

In recent years Klink & Co. has specifically found that a disproportionate number of vendors based in Hong Kong, China, Philippines, Singapore, Malaysia, Russia, Brazil and Indonesia, among other nations, are using shell corporations for illegal purposes in off-shore locations.   

The beneficial owners behind off-shore entities often are employees hiding their ownership of a vendor or the shell company may be disguising the fact relatives and friends of an employee are obtaining business improperly and often at much higher than market rates.    The off-shore 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% 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 that 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 off-shore, 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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