This article was republished with permission from Michael Volkov’s blog, Corruption, Crime & Compliance.
If you review the last 10 years of FCPA enforcement, the unmistakable pattern is rising expectations with regard to corporate compliance programs, particularly with regard to third-party due diligence and risk management. Over the course of numerous enforcement actions, the DOJ and SEC have reached the point where they are questioning not just the conduct of due diligence, but the quality of due diligence.
It is well established that companies have to identify and resolve all red flags, indicating a potential risk of corruption, or else suffer the consequences if bribery occurs. The DOJ and SEC expect high-quality due diligence reviews and assessments of potential third-party intermediaries.
The DOJ and SEC have to be careful here and apply the law fairly in cases where a third party engages in bribery. A post hoc review of a company’s due diligence review has to reflect the standard for due diligence – “reasonable inquiries.” The danger is that the DOJ and SEC could apply a strict liability formulation and use it to second-guess every exercise in discretion.
To this end, companies have to be mindful of a possible post hoc review by the government and document all efforts to identify red flags and to resolve such issues before deciding whether to engage the third party. In recent cases, the DOJ and SEC have cited due diligence reviews and relied on failures of judgment to support an inference of corrupt intent.
As companies implement more robust risk management programs, we can expect to see more post hoc analyses and questioning of due diligence programs. Companies have to design their systems in response to this rising expectation.
A larger percentage of companies are implementing automated due diligence systems. A recent NAVEX Global survey showed that over 80 percent of companies have implemented an automated due diligence system.
Unfortunately, even in these situations, companies have to continue building their system to ensure they rely on reliable data, identify red flags and document their resolution of each and every red flag. If a due diligence system is built on these principles, the DOJ and SEC will have a difficult time questioning a company’s decision to engage a third party.
Companies cannot blindly conduct due diligence, document each step and avoid careful analysis of third-party risks. The recent Och-Ziff enforcement action underscored this point when Och-Ziff conducted due diligence of the Israeli businessman, DRC Partner, and raised serious questions about DRC Partner’s integrity. In fact, the DOJ cited the internal disagreement within Och-Ziff management over whether to engage DRC Partner or not.
The government’s interest in citing internal debates or the manner and quality of resolution of red flags raises some interesting questions. If three officials argue to move forward with a third party and two disagree, can the company move forward, or will the DOJ/SEC cite the two opponents as evidence of an “unresolved” red flag?
To the extent the government continues to rely on such evidence raises a serious question about unintended consequences. Rather than encouraging a robust internal analysis and debate, companies may streamline or modify the internal review function to avoid creating potentially negative evidence of its due diligence program. By discouraging debate, the government may restrict careful consideration of due diligence factors and decisions.
Third-party risk management will continue to be the focus of DOJ and SEC FCPA enforcement actions. Companies have to design their programs in response to increasing scrutiny of third-party due diligence reviews. As robust programs are implemented, companies have to be careful how they design, document and analyze specific risk factors.
Michael Volkov is the CEO of The Volkov Law Group LLC, where he provides compliance, internal investigation and white collar defense services. He can be reached at 
