The legal issues raised by the engagement,
monitoring and termination of third parties
"When a company discovers potential corruption issues with one of its active third parties, it faces a difficult balancing act between litigation, commercial and regulatory risks."
Third party service providers are businesses’ single biggest corruption risk. The vast majority of prosecutions and regulatory settlements arise out of payments to agents, distributors, brokers, consultants, or other third parties.
Below, we highlight the key legal issues that commonly arise when an allegation of corruption is received in relation to an active third party and outline steps that can be taken when engaging third parties to enable companies to better deal with these legal issues as they develop.
What immediate steps should be taken by the company in the event of discovering an allegation in relation to a third party that it has engaged?
- Steps should be taken to determine the scope and nature of the issue, identify upcoming payments (outgoing and incoming) or other actions, ascertain its contractual rights, consider reporting obligations (internal and external) and preserve data as necessary.
Should payments be suspended while the company investigates the allegation?
- The seriousness of the allegation and associated regulatory risks needs to be balanced against the commercial risks of suspending payments.
Does the company need to self-report to financial/criminal authorities or seek consent to deal with potentially tainted funds?
- The company needs to consider early on whether it may need to self-report under applicable anti-bribery financial regulations or money laundering legislation – or whether it will want to seek consent to deal in potentially tainted funds to provide itself with a defence to money laundering offences. If so, this is likely to impact on the company’s broader reporting strategy.
What should the company do if it does not discover specific evidence of corruption but has residual concerns about the third party?
- Consider re-running enhanced due diligence processes, including interviewing the third party face-to-face to determine whether to continue with the relationship and the risks of making future payments.
- Examine any contractual rights to information or to investigate.
- Suggest disclosing to the client that you have paid a third party and obtain their approval.
Should outstanding payments be made unless and until hard evidence of corruption is found?
- Hard evidence of corruption will rarely be unearthed during an internal investigation given the limitations on evidencing-gathering. The criminal and regulatory risks need to be carefully considered in light of the weight of the evidence and may override the civil risks of being sued.
How can a company determine whether the third party has provided genuine services for which it should be paid?
- Consider identifying an independent senior employee or advisor who can assess the value of the services provided and asking for evidence of those services.
- For ‘introduction services’ consider whether an introduction was truly necessary.
How should the company deal with any civil claim from the third party in relation to its fees in circumstances where there is strong evidence of corruption
- Consider a strategy of resisting payment until you have comfort that it is legitimate.
Does it assist to structure the payment as a settlement of a civil dispute as to the third party’s fees?
- Structuring any payment as a settlement does not in itself mitigate the risk of making payment: what is important is the reality of the services for which payment is to be provided.
Positive steps that can be taken
Contractual provisions are important in terms of providing tools to deal with the legal issues arising out third party engagement. Ideally, a company should aim to give itself rights t
- Audit and investigate issues and suspend payments while doing so.
- Terminate and withhold outstanding payments on the basis of non-cooperation or breach of the company’s ABC policy.