Governments realize that the most efficient and least expensive way to reduce international criminal and unethical activity is by requiring corporations to ensure - or face liability for failing to ensure - that employees, intermediaries and supply chain partners comply with a host of laws and international human rights standards.

We see this trend very clearly with respect to the United States Foreign Corrupt Practices Act (FCPA) and similar laws criminalizing bribes to government officials. The great challenge with suppressing bribery across international borders is that the most shameless bribe-takers tend to hold public office, abusing that office to loot their country's coffers.  The government of one country can't easily prosecute the officials of another without damaging diplomatic relations.   Nor is it easy to extradite and prosecute local agents who funnel illicit payments to corrupt officials.  Pursuing the ultimate source of funds for the bribe payment - the multinational corporation - on the other hand, is relatively easy, and has become even easier over the past decade.

The FCPA first criminalized bribes to foreign officials in 1977.   Since then, anti-bribery conventions have proliferated and almost every country in the world is now under treaty obligations to criminalize international bribery.  These obligations, together with attention-grabbing fines and penalties from violations of anti-bribery laws, have encouraged informal networks among prosecutors in multiple countries who once waded through six months or more of red tape in order to get documents from foreign jurisdictions.  Today, it often takes little more than an international phone call between enforcement agents before several countries open criminal investigations of the same company, for the same misconduct.  Because there is no concept of international double-jeopardy, a criminal action in one country does not preclude criminal actions in other countries.

Corporations have faced staggering criminal and civil penalties (and equally staggering legal fees), for bribery perpetrated by a small subset of employees working far from headquarters or for the actions of a lone, nefarious third-party agent.  This is so because bribery schemes need not involve employees to create liability for the company.  Companies are liable for corrupt payments made not only by their employees but by third parties, if the corporation knew - or avoided knowing - or deliberately ignored suspicions - of the likelihood of an illicit offer or bribe payment.  Note that actual knowledge is not required.  Prosecutors, with the benefit of hindsight, ask:  should the company have known this would occur?  This standard has proven relatively easy to satisfy, as is borne out by the substantial proceeds of the government's anti-bribery enforcement efforts:  since 1998, the U.S. government has collected more than $3bn in criminal and civil penalties for FCPA violations.

Other government-to-government initiatives have had modest success, but none has had the impact of the impressive criminal penalties levied when multiple countries cooperate in a multinational bribery investigation.  In late 2008, for example, the U.S. Department of Justice, the U.S. Securities and Exchange Commission and the Munich Prosecutors' office spectacularly announced a coordinated settlement with Siemens for a record-shattering $1.6bn in fines and penalties for widespread anti-bribery violations involving government officials in more than 20  countries.

The incentive for companies to self-report misconduct is compelling.  Companies are fearful of long, expensive investigations and ensuing reputational and brand damage and so are increasingly heading into the DOJ, hat in hand, to confess their bribes (including those made by their third-party intermediaries), offer their cooperation and accept their penalty.   Their willingness to do so was given new urgency when the whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act were implemented last year.  Under these provisions, cash rewards of between 10 percent and 30 percent of ultimate fines are paid to whistleblowers who step forward with original information about bribery schemes. That's 10 percent to 30 percent of fines that have reached into the hundreds of millions of dollars.  The race to the DOJ is on.

As a result of the substantial bribery risks agents and third parties present to their principals, we now see significant corporate resources being devoted to building compliance programs around third parties operating all over the world.  These programs include training sessions, intensive due diligence reviews and other controls.  The reach of the FCPA is now effectively extended far beyond the U.S.  At a certain level, anti-bribery enforcement efforts offer a study in how governments have shifted to companies and their employees the burden of preventing or, alternatively, identifying and resolving, criminal misconduct.

The government's success with the FCPA now appears to be influencing other, more recent legislative efforts aimed not at illegal activity but moral imperatives and national security concerns.  On January 1 of this year, the California Transparency in Supply Chains Act of 2010 went into effect.  This law requires certain manufacturers and retailers doing business in California to publicly disclose the steps they have taken to eradicate slavery and human trafficking from their supply chains.  As with the FCPA, the California law is aimed at cutting off the supply side of the equation, recognizing that "businesses are inadvertently promoting and sanctioning [slavery and human trafficking] through the purchase of goods and products that have been tainted in the supply chain." Broader legislation at the federal level, H.R. 2759, has also been introduced that would require similar disclosures in SEC filings.  Similarly, Dodd-Frank adds a new disclosure requirement to SEC filings informing investors whether "conflict minerals" that originated in the Democratic Republic of Congo and surrounding countries have been incorporated into an issuer's products at any point in the supply chain.  The conflict minerals provisions, like the human trafficking disclosures and the anti-bribery laws, all require companies to have robust controls around their agents and suppliers in order to elicit accurate information, compel good behavior and mitigate risk.

To be sure, companies have always had to worry about sanctions, export and trade violations that arise from conducting business with so-called "denied parties."  Governments around the world maintain various lists of individuals and entities with respect to whom restrictions and outright prohibitions on trade may apply. Similarly, international organizations such as the United Nations and the World Bank also maintain lists of entities and individuals who are debarred from competing for or performing under applicable contracts.  The objective of these lists is to require companies and individuals to limit trade with, and therefore sources of funding to, a host of bad actors.  There are over a hundred of these denied parties lists in the world. For example, the United States maintains a Denied Persons List, an Unverified List, a Debarred List, a Nonproliferation Sanctions List and, perhaps the most consequential, the Specially Designated Nationals List (SDN).  The SDN prohibits U.S. persons - operating anywhere in the world - from interacting on almost any level with any entity or individual listed on the SDN.  The lists are ever-changing but rarely user-friendly, often providing no information beyond a first and last name.  A Jose Garcia, for example, appears on the Specially Designated Narcotics Trafficker List, the Interpol Wanted Fugitives List, and many other lists.  The generically named "Global Service International" appears on a number of international terrorist watch lists.

It appears that the days of choosing a supplier based on price, quality of goods delivered or other objective factors are coming to an end.  Instead, companies must understand exactly who their suppliers are, how and where they produce their goods and whether their supplier's internal business processes comport with international laws and standards.  All of this information must be gathered and analyzed on a continuous basis.

The burden on the corporations who must collect and monitor this information is daunting.  The key question is how to design a robust, yet cost-effective and practical, solution to this complex problem. To respond to this challenge, TRACE, a non-profit, drew on more than 10 years in the compliance industry to launch a solution - TRAC - that is entirely free to multinational companies.  TRAC has been designed and beta tested with the help of multinationals from the U.S., the United Kingdom and Australia.  TRAC eliminates the inefficiencies of redundant, paper-based vendor on-boarding processes by standardizing the information multinationals need to address concrete risks in the supply chain and by making suppliers and vendors responsible for providing accurate and current information that is readily accessible by all of their business partners.  TRAC then continuously screens these partners against worldwide denied parties and debarment lists.

In addition, TRAC satisfies a number of disclosure obligations by requiring applicants to answer a series of compliance questions, including those geared to "conflict minerals" and slavery and human trafficking.  Companies can access the database from anywhere in the world and, for their suppliers, receive affirmative notification of material changes to the file.   TRAC is a business-friendly solution that provides companies with the confidence of knowing that their efforts are in-line with those of other similarly situated companies, ensuring a sane and consistent approach to the expanding challenge of supply chain compliance.

Source: TRACE International