While the United States and governments around the world have pushed forward COVID-19 relief packages and Chinese manufacturers have restarted production, supply chain and manufacturing disruptions continue to grow. At times, needed medical equipment that companies can procure is being purchased outside of their normal supply chains, through agents and intermediaries. While vendors and suppliers are typically not high-risk third parties from an FCPA compliance perspective, they still can create significant risk – particularly in circumstances where many companies are going outside of their normal supply chains. There are a number of steps that can be taken to ensure delivery of needed medical equipment while at the same time addressing the risks that may arise in any given transaction.
The health crisis created by the Coronavirus (COVID-19) pandemic has upended the global economy. While the United States and governments around the world have pushed forward relief packages and Chinese manufacturers have restarted production, supply chain and manufacturing disruptions continue to grow. As the media is now widely reporting, healthcare providers and suppliers are struggling to procure even a fraction of the life-saving medical equipment and supplies that they need. At times, the equipment that companies can procure is being purchased outside of their normal supply chains, through agents and intermediaries, and at prices exponentially higher than they normally pay. Once the available equipment is finally located and purchased, US-based purchasers often find that these critical goods are stuck in overseas warehouses for days, or even weeks, given global restrictions on flights around the world.
This unprecedented healthcare crisis is also quickly becoming a nightmare for compliance officers and general counsel, where carefully vetted supply chains and procurement processes must be cast aside to meet critical needs. While companies need to adapt to meet these demands, there is little doubt that the US Department of Justice (DOJ), US Securities and Exchange Commission (SEC) and foreign regulators will closely scrutinize these supply chain and procurement issues once this crisis subsides. Indeed, DOJ has already announced at least one action against Coronavirus-related fraud.
The Foreign Corrupt Practices Act (FCPA) prohibits offering, giving or authorizing the transfer of anything of value to “any person, while knowing that all or a portion of such . . . thing of value will be offered, given, or promised directly or indirectly, to any foreign official“ to obtain or retain business. The FCPA’s prohibitions apply to direct payments to a foreign official and also to indirect payments made through third parties. Many of the largest FCPA enforcement actions undertaken by the US government have involved such third-party payments. DOJ and the SEC take the view that even if an organization has no actual knowledge that bribes are being paid, it may still face liability (as will its management) if money is paid to third parties with a reckless disregard for circumstances which suggest money is being used for corrupt purposes. In other words, sticking your head in the sand won’t save you or your organization from a government investigation.
While vendors and suppliers are typically not high-risk third parties from a compliance perspective, they still can create significant risk – particularly in circumstances where many companies are going outside of their normal supply chains. This risk is elevated when local agents or intermediaries are involved on a company’s behalf – whether to assist in locating and procuring the goods or in serving as a logistics provider or freight forwarder. Risk is also elevated if you are procuring product from a jurisdiction with significant state-owned industry. Red flags in arranging transactions concerning the purchase of marked-up product could include excessive commissions to intermediaries, requests for payment in cash, requests for payment to offshore bank accounts, requests to work with a local intermediary who has no apparent experience in the industry or an unexplained ability to expedite your shipment despite global cargo delays. There are attendant reputational risks that you may face beyond anti-corruption laws in these circumstances, including potential human rights abuses or environmental concerns.
That said, these risks do not need to stop suppliers and providers from procuring desperately needed equipment in this crisis. And given basic principles of supply and demand, there may be perfectly legitimate reasons that product is being sold at a mark-up. There are a number of steps that can be taken to understand and address the risks that may arise in any given transaction.
Try to use your normal compliance and third-party retention processes where possible, and document what you were or were not able to do.
Enter into a written agreement with your manufacturer or supplier, if possible, and make sure that your suppliers provide sufficient documentation and detail for equipment – particularly when the price is significantly higher than normal.
Understand what any agents or intermediaries are doing on your behalf, and what services they are purportedly providing.
Conduct risk-based due diligence on any agents or intermediaries that you retain or that are otherwise involved in a transaction.
Enter into a written agreement with any agents or intermediaries who are involved in procurement. The agreement should clearly include any amount in commissions that they will receive, along with anti-corruption representations and warranties.
Conduct post-transaction follow-up. If red flags are identified or any concerns are raised, you should not wait to look into them until operations are back to normal. Consider what you can do to address or remediate potential issues, ensure that documentation and data is preserved and assess how you can review and investigate under the current circumstances.
 For US issuers, the FCPA’s accounting provisions also require that their books and records are kept in reasonable detail and accurately and fairly reflect transactions. This creates additional liability for any inaccurate payment records, even if no bribe is paid.