Vetting Vendors In China to Prevent FCPA Violations and Show Due DiligenceOften, the fault for an FCPA violation doesn’t lie with the company directly. Instead, it comes from a relationship that a company forms with an outside vendor or consultant. This is especially true in China, where it’s common for companies to hire business representatives to help them close deals and manage overseas relationships. These consultants can be quite useful in helping companies navigate the major cultural differences that people run into doing business in China. However, if someone chooses the wrong vendor, that relationship can soon cost them.

One popular casino enterprise, the Las Vegas Sands, found that out the hard way. When the company was looking to expand operations in China and Macau, they hired an overseas consultant to manage their company’s reputation there. That wound up being a $7 million mistake when the representative violated the FCPA. There’s a lot we can learn from this issue, and a major part of that is better vetting of vendors is a necessity when doing business overseas.

How the Sands Stumbled With a Consultant

The Las Vegas Sands wanted to expand business in China and the popular tourist spot Macau in 2006. To manage that expansion, they hired a business consultant to promote the brand and represent them in the region. From 2006 to 2009, they paid that consultant more than $62 million to help manage their regional presence.

Unfortunately, the consultant used the money to make inappropriate payments and it was alleged that the payments made to the consultant were done with the express intent of hiding those bribes. However, the Sands was able to mitigate their damages in the case by doing the following:

  • They reported the issue quickly – They probably didn’t report the issue as quickly as they could have, as there were warnings from financial staff that the consultant would be seen as a problem by FCPA enforcers. However, on further investigation, they did disclose the issue with the consultant.
  • They acted – The Sands terminated its relationship with the consultant upon realizing the extent of the issue. They pulled out of all deals put in motion by that consultant and stopped making any payments as well.
  • They cooperated in the investigation – Once they reported the issue, the Sands also turned over records to assist in the investigation. They promised to continue participating in the investigation as part of their non-prosecution agreement.
  • They took steps to enhance their compliance program – The Sands hired an outside auditor to review their records. They also created a more transparent accounting practice for payments to external vendors.

Because they cooperated, the Sands was able to gain a 25% reduction in the fines and penalties that were levied and they were able to escape prosecution. However, the Sands may have avoided this issue in the first place by vetting their vendor more thoroughly.

The Questions You Need to Ask Vendors in China

Better vetting might have helped in the Sands’ case. After all, if the business consultant was behaving inappropriately with their account, it’s likely they had a history of doing so with other accounts. In addition, if there’s an obvious blemish on that vendor’s records, enforcement agencies are going to hold you responsible when something goes wrong. All you need to do is look at the Sands’ investigative report to see that the onus was on them for the issue. The consultant isn’t even named. Before you hire a vendor, either to market for you or provide you with supplies, you need to consider the following:

  • What are the vendor’s qualifications? Business references are common in China, so make sure to ask for them. You want details which are specific to your needed service. With the Sands’ case, common questions would include asking about successful casino marketing campaigns in the past as well as how those campaigns came to be.
  • Is the vendor licensed to do business in China? Companies that wish to do business in China must have a valid business license, usually issued through the Administration for Industry and Commerce. This comes in the form of a certificate, but you can check the business license yourself by looking at the local office where the business’s physical address is located.
  • Who are the directors, managers, and supervisors who will be in charge of your account? In China, those who are in positions of high authority at a company must have a certificate that shows they have no criminal convictions. The directors of that business should be able to provide this certificate on demand.
  • What is the business’s credit rating? A business on the edge of bankruptcy or with a lot of debt is generally a poorly-run business. You’ll want to look at the company’s financial statements to get an idea of their own business practices.

Once you receive this information, it needs to be verified. Unscrupulous vendors may forge documents to gain a contract. If they do and if you fail to catch it, they open your company up to an FCPA violation, and the SEC will find you didn’t do your due diligence.

AC Global Risk offers a unique tool for vetting vendors in the Chinese market. Remote Risk Assessment technology allows us to remotely gauge the risk of a given individual via a short, simple phone interview. This can assist you in determining the risk level of a vendor in China. If you want to better vet those you do business with within the Chinese market, contact us about leveraging RRA.  

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