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  August 5th, 2016 | Written by

Debunking The Top Ten Myths About International Distribution Agreements

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  • Exporters using distributors can be held accountable for bribes their distributors make.
  • A U.S. company was charged when its distributor in Brazil was caught paying bribes to customers.
  • Exporters that sell to local governments are particularly at risk of violating the U.S. Foreign Corrupt Practices Act.

Most companies today know that foreign bribery is bad, and may even know it’s illegal. They may have heard of the U.S. Foreign Corrupt Practices Act (FCPA), or the UK Bribery Act, and other similar laws.

But there are plenty of companies that export using distributors still don’t understand that they can be held accountable for bribes their distributors make. Maybe it’s because it seems far-fetched that a completely independent company like your distributor can put you at risk for their actions. Maybe it’s because it seems unlikely your distributor or you will get caught.

Whatever the reason, the truth is: more and more companies are finding themselves subject to FCPA enforcement because of their distributor’s bribes.

One example: A U.S. company was charged with violating the FCPA because its distributor in Brazil was paying bribes to customers. The case settled, with the company paying a large fine. The U.S. government did not claim that the U.S. company actually knew about the distributor bribes. Instead, the claim was that the U.S. company should have known because it did not takes the necessary steps to prevent that bribery.

According to the U.S. government, here’s what that company (and every U.S. company) needed to do with their foreign distributors to avoid liability:

  • Conduct thorough due diligence, which may include regular background checks and investigations on distributors.
  • Include anti-bribery language in all distributor agreements (which presumes you must have written contracts) that clearly allows you to terminate if you discover bad behavior.
  • Train your distributors (as well as your employees who interact with them) regularly on anti-bribery compliance.
  • Clearly understand how your products are reaching the end customers and confirm if there are any other intermediaries.
  • Prohibit use of sub-distributors, agents, or other intermediaries by your distributor unless you have investigated appropriately and provided written approval.
  • Make sure your distributors’ customer margins, and any other compensation you pay them, are reasonable and customary.
  • Have controls in place to make sure any red flags are raised and addressed.
  • Have your internal audit or finance function monitor this program regularly.
  • Document everything that you verified, as well as how any issues or problems were investigated and resolved.

If you have foreign distributors and haven’t at least considered some or most of these steps, you’re at risk—especially if your distributors sell to local governments. And remember that the reach of what is a government in many countries is far beyond what is typical in the United States. In healthcare, for example, medicine is socialized in most countries, and that means that the hospitals, doctors, and clinics that your distributor sells to are all government officials and entities.

Don’t believe you might get caught? Most of the companies on the growing list of enforcement cases never believed it would happen to them, either.

Here’s some of the ways they got tripped up:

  • The company was for sale, and distributor bribes were found during due diligence.
  • Company auditors asked questions and found evidence of bribery.
  • Competitors hear rumors of bribery and report you.
  • Whistleblowers, including current and former employees and consultants, contact the authorities.

By the way, bribes are still pretty common in many countries. So make sure you get good legal advice when exporting so that you can assess bribery risks and create an anti-corruption program that works for your company.

Doris Nagel is managing partner of Globalocity, and has over 25 years of hands-on global experience, focusing on strategic partnering, indirect sales channel management, and market entry. She’s a frequent speaker and author, and is currently working on a book on international distributor networks. Get a free excerpt from the book here.

Editor’s note: This is the fifth in a series of articles on Debunking The Top Ten Myths About International Distribution Agreements. Check out the previous articles in the series:

Myth #1: We don’t have time for a contract – we need to get busy selling!

Myth # 2: How we found our distributor is totally separate from our contract.

Myth # 3: Contract templates are great, because that way we can skip the legal review costs.

Myth #4: We Can Just Have Our Local Contracts Lawyer Review Our Agreements