Fraud red flags for third-party intermediaries

In some countries, the government requires foreign companies to work through third-party intermediaries (TPIs). In others, it is just practical — TPIs often have the local knowledge and cultural know-how to get things done and can provide important services like contract negotiation and permit procurement.

But working with TPIs can also expose companies to serious risk. Anti-corruption laws in France, the US, and the UK can hold companies accountable for their intermediaries’ actions. For example, in early 2020, the aeroplane manufacturer Airbus settled a global corruption investigation with British, French, and US authorities, agreeing to pay $4 billion in combined penalties to settle allegations that it used intermediaries to bribe public officials. Just last year, Walmart paid $282 million in combined penalties to the US Securities and Exchange Commission (SEC) and the US Department of Justice for illegal payments made by TPIs on their behalf in Brazil, China, India, and Mexico, leading to violations of the US Foreign Corrupt Practices Act (FCPA). In fact, just over a quarter of all SEC FCPA enforcement actions in 2019 involved some form of abuse via third-party intermediary.

“The risks are absolutely huge — existential — with fines that are many hundreds of millions at a time,” said Will Davies, a London-based partner and the global co-head of forensic investigation services at Grant Thornton. “There’s also the risk to the company’s reputation.”

The best way to protect your company is to carry out due diligence beforehand, which Davies said is a requirement in several countries. Here are some of the top red flags that doing business with a TPI may not be worth the risk.

Working closely with politically exposed persons

If anyone with a position of authority at the TPI is working in or has previously worked in the government or is closely connected with public officials, it is a warning sign. A company that makes large or regular political contributions, conducts private meetings in government offices, or insists on meeting officials alone is also suspect.

“It’s very important to know who the beneficial owner of the company is. That’s not always easy, because some jurisdictions are very opaque,” said London-based Darren Matthews, executive managing director and head of Europe, the Middle East, and Africa at K2 Intelligence. “If the intermediary isn’t upfront and willing to supply that information, it’s a red flag.”

Past involvement in corruption-related litigation

If due diligence reveals that the company or any senior official at the organisation has been involved in corruption-related litigation, investigations, or enforcement actions, be wary. Another red flag is if there have been news stories about the TPI that question its integrity, according to Davies.

“If they’ve gotten involved with corruption in the past, or public record searches bring up prior litigation, or even if there are rumours in the industry about the third party, it’s a red flag,” he said.

Their finances raise questions

If the TPI is in financial trouble, or if it requests payments to multiple accounts, offshore bank accounts, accounts in a different name, or in the form of political or charitable donations, that is a warning sign. It is also worth checking to see if the TPI has an internal whistle-blowing system or channel for raising concerns, which indicates that it takes ethics and compliance seriously.

Davies recommends systemic checks on a TPI’s internal compliance programmes to ensure that they understand and follow global anti-bribery and corruption rules.

Lacking the qualifications, credentials, or referrals

Another potential cause for concern is if the third party lacks practical experience or is in a different business than that for which it has been contracted. Similarly, if the organisation is unwilling to provide a detailed performance plan or resists signing standard contracts, it is probably not worth working with it.

“They should be willing to sign a basic contract outlining what is required from them, the tasks they will perform, how they will report to you, and what you will pay them, and that you can assert the rights to audit, including surprise audit,” said Davies. “If they resist mirroring your own standards for managing risk, it’s a red flag.”

Poor reputation in the market

Reputation matters. It is a good idea to ask in-country contacts in the same industry about the intermediary before committing.

Davies said, “You should start doing background research the moment you start negotiating with a third party, be it open-source or on-the-ground research. The risk of getting it wrong is getting business critical, and the best way to protect yourself is to avoid getting involved with the wrong sorts of intermediaries in the first place.”

Working in a high-risk country or industry

If a TPI works in a country or industry that ranks high in Transparency International’s Corruption Perceptions Index, they should be treated as higher risk and warrant additional due diligence.

“This is one of the riskiest areas for a lot of companies working in emerging markets, because in some countries it’s almost cultural that government officials and business leaders receive kickbacks,” said Matthews. “But that’s illegal, and you’re responsible for everything they do on your behalf. It’s the law that you need to know who you are dealing with.”

— Malia Politzer is a freelance writer based in Spain. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.