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Corporate Compliance Insights
Home Risk

Risky Business

by Jeffrey Klink
November 16, 2016
in Risk
Compliance challenges abound when third-party vendors have offshore ties

There has been increasing use of offshore jurisdictions by third-party vendors to elude taxes and hide illegal or unethical conduct, including bribes and kickbacks. Third parties include joint-venture partners, independent sales agents, distributors, manufacturers, customs agents, logistics and transportation companies and others. Regardless of their designations, use of shell corporations in offshore locations by these third parties, especially by vendors based in Asia, has skyrocketed in recent years.

Offshore jurisdictions such as the British Virgin Islands, Seychelles, Samoa, Panama and Belize, to name just a few, have been used for many years as tax havens. These offshore tax havens are no longer just used by multibillion-dollar companies, financial institutions, hedge funds or the ultrawealthy. Many small companies are now using these offshore tax havens to hide revenue, but another primary purpose is now to disguise the identities of a company’s owners, providing ample opportunities for kickback and bribery schemes to flourish. When a vendor has offshore ties, be aware of the multiple possibilities for compliance problems arising.

In recent years there have been a disproportionate number of vendors based in Hong Kong, China, the Philippines, Singapore, Malaysia, Russia, Brazil and Indonesia, among other nations, using shell corporations for illegal purposes in offshore locations.

The beneficial owners behind offshore entities are often employees, hiding their ownership of a vendor. Often a shell company may be disguising the fact that relatives and friends of an employee are obtaining business improperly and often at much higher than market rates. The offshore entity serves to hide kickback or bribery schemes in most instances.  In many cases, vendor fraud such as this costs organizations as much as 10 to 20 percent of the amount of the contract.

When government officials are involved in third-party vendor schemes, the Foreign Corrupt Practices Act (FCPA), and other laws relating to bribery, can create substantial legal consequences for global organizations. Your company may be unknowingly dealing with a politically-exposed person who is receiving substantial bribes through shell vendors.

Here are three steps your organization can take to address and prevent third-party vendor fraud that may create FCPA or other compliance risks:

  1. Require vendors to identify any person that has any financial interest in their business.  This should include the names of individuals that are shareholders of any business entity that has a financial interest in the third party. Verify the information you are provided.
  2. Conduct appropriate risk-based due diligence on vendors and shareholders, including, but not limited to, reviews of watch lists, corporate registration documents, litigation matters, FCPA investigations and other corruption cases, media and more. Always perform site visits to confirm the activities of the third-party vendor. If the vendor is registered offshore, do more, including interviews of knowledgeable sources.
  3. Provide on-line and in-person training of key employees and third party vendors regarding your organization’s code of ethics and anti-bribery/FCPA compliance program. This should be done on a regular and continuing basis.

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Jeffrey Klink

Jeffrey Klink

Jeffrey M. Klink is President and CEO of KLINK, an international business intelligence firm proactively and confidentially uncovering fraud, fictions and phantoms before they become financial, legal or public crises. The firm advises global clients in more than 100 countries annually. KLINK’s expertise in higher-risk regions is unparalleled. As a former U.S. Department of Justice criminal prosecutor and former office head and managing director of a global consultancy, Mr. Klink focuses his practice on the Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act compliance, mergers and acquisitions, third-party due diligence, litigation support and complex investigations. He has performed hundreds of complex investigations for manufacturers, banks, hedge funds, technology firms, pharmaceutical companies, professional services companies and law firms. He has personally trained hundreds of employees and third-party vendors on bribery and trade compliance in Asia, Europe, the Middle East and the Americas. Mr. Klink received his law degree and bachelor’s degree from the University of Pittsburgh. He is a member of the Pennsylvania Bar and is a licensed investigator.

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