How to turn $11K into $2MM (and wish you hadn't)

Ed Marsh | May 3, 2016


"A Wake-up call for SMBs"

“This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales,” said Kara Brockmeyer, chief of the SEC Enforcement Division’s FCPA Unit. “When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.” SEC press release

What did Smith & Wesson do?  

The short version is that they agreed that their rep would give approximately $11,000 worth of pistols to contracting officials in Pakistan as bribes to win an order for 548 pistols that represented $107,000 in profit.

You can imagine how the rest of the story plays out. They were ordered to disgorge the profit, pay interest and a fine which totaled two million dollars.

And that settlement was announced in 2014 well before:

  • Brazil's President Rousef was impeached largely because of her alleged involvement in the Petrobras scandal
  • UNAOIL became known as the company that bribed the world
  • Nigeria's President Buhari uncovered billions of dollars allegedly looted from the treasury by the National Security Advisor and Oil Minister
  • FIFA's leadership and board were rocked by allegations

In the two years since S&W was fined by the US SEC the world has become substantially more aware of the scope and magnitude of global corruption. And finally, it seems, governments are collaborating more on investigation & prosecution and harmonizing their statutes.

For residents of emerging markets who are disproportionally hurt by the secondary effects of plundered national wealth, that's good news.

For US SMBs who do global business - selling AND buying - that's a reason for alarm.

And unless you routinely sell to foreign governments, you probably aren't even aware of most of this. Much of what's written about it is in stiff legal language and cumbersome & complex theory. But as a SMB you need to know. Here's the skinny.

"But...we don't pay bribes!"

Of course you don't. That's not the point. 

Bribery is illegal everywhere in the world; there are differing degrees of enforcement, but nowhere is it not prohibited.

And more statutes are being added to the books while those that have been laying fallow are increasingly enforced.

That means that "not paying bribes" is no longer enough. You may well be responsible for the actions of your 3rd parties (selling distributors, buying agents, freight forwarders, customs brokers, etc) - EVEN WHEN THEY ENGAGE IN CORRUPTION WITHOUT YOUR KNOWLEDGE!

In fact the Department of Justice has brought FCPA enforcement actions simply because a company which included audit provisions in foreign rep agreements had failed to conduct those audits - essentially absent any indication of wrongdoing, they were in violation for failing to take steps to detect any potential violations.

It's not enough to simply have a clear philosophy yourself. And since a majority of enforcement actions originate in customs related actions, there's little safety in the traditional assumption that only sales to foreign governments led to the risk.

The personal criminal kicker

But gets even worse! 

It's not just your company that will find itself in the cross hairs of an FCPA Enforcement action - individuals can too. And it's not just civil exposure, but criminal too. So officers & directors of corporations may be exposed in addition to any who participate directly or conspire in violation of the FCPA.

And that's got some profound implications to corporate strategy. For instance, the calculation on time and investment to enter markets, or savings from sourcing from markets, could be substantially impacted by the realization that doing business there (obtaining import or export permits, certifications, etc) often entails compromise to strict anti-corruption policies.

That doesn't mean you shouldn't buy or try to sell there. But you must build compliance into your strategy. Are you willing to invest for 7 years to get the first order or must you have it in 2? If your shipment sits on the pier waiting for export clearance for 2 months will you lose a big order? Are your sales people's compensation plans based on commission? Do your quarterly earnings calls assume a "get it done" tone?

Building compliance into strategy

I recently interviewed FCPA expert Richard Bistrong on his FCPA enforcement experience and the lessons he learned that could benefit SMBs. He had a lot to say - and what he says comes with the very compelling authenticity that only his background can provide.

The biggest lesson, though, has to be the role that boards need to start to play in compliance. Leaving the "compliance" expert in the CFOs office to manage it is akin to catching falling knives. Anti-corruption compliance must be designed into every company's go to market plan.

The 3rd party challenge

Let's assume your board, CEO, president, VP Sales, CFO - in other words the entire executive leadership team - embrace and model a philosophy of unwavering sanctity in all business activities. That means that they say it not only semi-annually at the required training, but further never send conflicting messages about deals, markets or situations. That's a start.

And even if you would be decisive in responding to a distributor who asked for a falsified invoice to reduce import duties - or some other request which they believed to be routine and innocuous and you knew to be simply wrong.

That still doesn't address the issue of your exposure to 3rd parties taking actions on their own which benefit you. How do you limit that exposure or mitigate the risk? Regular training is key. Zero tolerance (that means no ignoring, much less not winking) is critical. But starting long before any potential transactional issues is most important - and the right way to start is with appropriate due diligence screening.

I recently obtained TraceCertification for my business so that I could advise others from a practical perspective. The process is extensive and potentially arduous; and it's supposed to be.

That's a small investment which you can make early in discussions with international 3rd party customers, agents or vendors. Not only will you have a reasonably defensible starting point, but you

  • send a clear message from the beginning of your business relationship
  • allow the screening process to happen before there's a seductive "deal on the line"
  • and avoid unnecessary resource investment in negotiating contracts and building relationships with 3rd parties who you might have found were unacceptable through basic due diligence

The first step to managing FCPA Enforcement risk is to understand it

You've probably heard of the FCPA (maybe Siemens, or Wal-Mart) but never stopped to think how it might apply to your business. But it does - whether you sell or source globally. 

I've combined my interview with Richard and my years of experience on the ground in notorious markets like Brazil, India and Nigeria, and put together a practical guide for SMBs to understand, manage and mitigate their FCPA risk. It's a free download. Grab your copy here.

It's jargon free and written by and for SMB owners and execs.


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