No contract in the world could stop an intermediary truly determined to commit bribery, but contracts can be quite handy enforcement tools. Jim Nortz considers what makes an intermediary contract most effective.
Read Part 3 here.
One day in Contract Law class, Professor Kelly asked one of his better students, “Now if you were to give someone an orange, how would you go about it?”
The student replied, “Here’s an orange.”
The professor was livid. “No! No! Think like a lawyer!”
The student gave it some thought and said, “Okay, I’d proffer to him a written agreement requiring notarization, certification by multiple witnesses and execution in triplicate that reads in part: ‘In consideration of prior acts of kindness directed by you to me, and the expectation of the same in the future, I hereby give and convey to you all and singular, my estate and interests, rights, claim, title and advantages of and in, said orange, together with all its rind, juice, pulp and seeds, and all rights and advantages with full power to bite, cut, freeze and otherwise eat, the same, or give the same away with and without the pulp, juice, rind and seeds, anything herein before or hereinafter or in any deed, or deeds, in instruments of whatever nature or kind whatsoever to the contrary in anywise notwithstanding…’”
This old lawyer’s joke illustrates why so many business professionals avoid the law department and have a disdain for written agreements. There may be many occasions where written agreements and law department engagement is not necessary – where a handshake of a trusted counterparty will suffice. But contracting with intermediaries does not qualify as one of those occasions.
Business relationships with intermediaries often involve complexities that necessitate a written agreement to ensure there is a “meeting of the minds” and to minimize the potential for costly conflicts between the parties. Moreover, as detailed in the first part of this series, intermediaries often pose significant corruption risks. Written contracts are a vital tool in mitigating such risks. But, as with any tool, an intermediary contract’s effectiveness depends upon how well it is constructed and how it is used.
Elements of an Effective Intermediary Contract
Business terms set forth in an intermediary contract will necessarily be idiosyncratic and dependent on the nature and duration of the services intermediaries are called on to perform. However, common to all such agreements should be contract terms mandating a commitment to conducting business in accordance with the law and ethical business practices, accounting standards and accurate financial recordkeeping, and transparency.
A Commitment to Lawful and Ethical Business Practices
Intermediary contracts should contain plain language setting forth the expectation that intermediaries conduct their business in accordance with the law and applicable ethical standards. In so doing, such clauses should expressly prohibit intermediaries from making payments or transfers of value to your company’s employees, government officials or other entities for corrupt purposes. They should further require intermediaries to maintain an internal code of business conduct and an associated employee training program. The intermediary contract should also state that a violation of these terms is grounds for immediate termination of the agreement.
However, the specific contractual language regarding these mandates is less important than the manner in which you use it to convey the company’s genuine expectation that your intermediaries abide by them. As often as not, intermediaries hungry for revenue will sign whatever paper you put in front of them regardless of the compliance terms and conditions. Use the contracting process as an opportunity to deliver the clear message that when it comes to expectations around business integrity, you “really mean it.”
Make sure the intermediary understands that there’s no “wink and a nod.” Instead, let them know unequivocally that you are demanding that they play by the rules and that if they don’t, you will swiftly sever your relationship with them. Ideally, this would merely repeat and re-enforce messages already delivered during first- and third-party due diligence processes.
Even in the best of circumstances, it is difficult to monitor and detect an intermediary’s corrupt business practices. Absent accurate, audited financial records prepared in accordance with accounting standards, it’s “mission impossible.” At the least, your intermediary contracts should require your intermediaries to maintain accounting records at a reasonable level of detail in order to:
- Accurately and fairly reflect the transactions and dispositions of the assets of the intermediary, including (a) detailed journal entries for individual transactions and the avoidance of grouped transactions in a single journal entry, with descriptions that explain the business nature and rationale of each journal entry, and (b) retention of hard copy or electronic documentation supporting each transaction;
- Permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements;
- Ensure the intermediary has no off-the-books accounts and prevent the recording of transactions using forged, false or fraudulent supporting documentation;
- Cause such statements to reflect fully, accurately and fairly the results of transactions entered into by the intermediary;
- Allow for the complete and accurate tracking and recording of business transactions with government entities including, but not limited to sales, discounts, rebates and each tender participation, whether successful or not; and
- Be certified as accurate by an independent auditing firm.
Do not presume your intermediaries have accounting systems with these attributes. In my experience, many Intermediaries’ financial records comprise filing cabinets and boxes stuffed with disorganized and incomplete collections of paper receipts and spreadsheets with vague or indecipherable categories of expenditures. If you’re contemplating a business relationship with a firm that has poor financial recordkeeping practices, insist they conform to the minimum accounting standards detailed above prior to inking a deal with them.
“Trust but verify” is a phrase that aptly describes the posture you should take with your intermediaries. Because you are at risk of being held accountable for their behavior, you should insist upon the right to “look under the hood” to ensure they are conforming to sound accounting practices and appropriate standards of conduct. To ensure you have this right, your intermediary contract should expressly provide that upon request and reasonable notice, the intermediary shall:
- Permit you or your auditors to visit the intermediary’s facilities during regular business hours to inspect the intermediary’s premises, interview intermediary employees and take other similar measures to verify compliance with the law, industry ethics standards and other contract provisions; and
- Provide you or your auditors access to the intermediary’s books and records or any independent audit reports detailing, summarizing or evaluating the information in the intermediary’s books and records.
Regardless of how well-drafted, no contract language can prevent your intermediaries from depositing a bag of cash in the trunk of a government official’s car or engaging in myriad other corrupt business practices. To boost your chances of success in preventing such conduct you should develop and implement effective intermediary compliance training, monitoring and auditing programs. These will be the subject of the next two articles in this series.
Read Part 5 here.