In case you’re not following the latest international business scandals – like Unaoil and the Panama Papers – We are seeing a rapid revolution in whether, when, and how companies conduct due diligence when engaged in partnering with overseas companies. This is particularly important in the San Francisco Bay Area where many home grown companies have close business relationships with partners, customers, vendors and suppliers located in foreign markets like China and India.
If your organization conducts business overseas, it’s now more critical than ever to identify the beneficial owners of the joint venture partners, third party intermediaries, distributors, agents, suppliers, vendors, customers, account holders and anyone you do business with.
The bottom line is basic and should be followed by every company conducting business. The idea sounds unrealistic and burdensome but it is becoming a fundamental risk management exercise for which a routinized process and procedure should be religiously followed. The sooner your company addresses this overarching need the better.
Anti-Corruption Measures. Companies have to identify and assess the risk of dealing with entities that act on the company’s behalf overseas, and can thereby cause liability for the company for bribery and other misconduct. There is no minimum requirement for an illegal bribe, and as such ownership of an entity has to be confirmed all the way down to the smallest ownership interest. For example, if a joint venture partner owns 10 percent of a venture, and a government official owns 1 percent of that 10 percent entity, the arrangement may be a screen for a bribery scheme.
Anti-Money Laundering Measures. A bank account may be opened by an entity that includes a government owner who is as small as 1 percent of the entity. Again, the account may be used to funnel illegal proceeds from a bribery scheme or other illegal activity. The government official may be using the account to carry out that scheme and the bank has to identify all of the beneficial owners of the entity to ensure there is no improper connection.
Outside the context of financial institutions, a company may on occasion accept payments from third party payers, or make payments to third party entities at the direction of a vendor or supplier. If the company does not know who owns the recipient of the payment, or the entity making the payment to the company, the company is exposing itself to money laundering and reputational risks.
Sanctions Compliance. The above principles also apply to sanctions compliance. If a business entity includes two owners of 25 percent each who are prohibited entities, the company would be a prohibited entity through the ownership rule of the Foreign Corrupt Practices Act. Even if a prohibited person has an interest below 50 percent in an entity, it’s important to know that for monitoring purposes and to be aware that it may raise reputational issues of concern.
Reputation Management. Finally, when companies manage their supply chain risks, there are important reputational concerns that can develop. For example, a company does not want to engage entities or individuals who may be connected to child labor violations, slave labor or human trafficking, and a host of other significant issues. As a consequence, it makes sense for companies to identify the beneficial owners of all of their suppliers and vendors to make sure they are aware of reputational risks, along with legal risks that may be created.
The new compliance requirement is to know who you’re dealing with in the outside world, be it a customer, a partner, a vendor or supplier. Companies can no longer ignore this risk and the multitude of concerns that surround interactions with entities and individuals outside of the company.