Tips for international franchisors establishing FCPA compliance programs

January 18, 2017

Foreign Corrupt Practices Act Alert

As a new year begins, franchisors and others eagerly await likely changes to U.S. laws and regulations. President-elect Trump has vowed to make unprecedented changes to U.S. trade and minimum wage laws. Although in the past he characterized enforcement of the Foreign Corrupt Practices Act (FCPA) as “absolutely crazy” and “horrible,”[1] most practitioners agree that vigorous enforcement is here to stay. Accordingly, below we offer tips to international franchisors as they implement or revisit their FCPA compliance programs.

The Foreign Corrupt Practices Act

The FCPA criminalizes the corrupt giving of “anything of value” to foreign officials by domestic and publicly traded companies or their agents for the purpose of getting or keeping business. Prosecutors define “anything of value” very broadly. Recently, unpaid internships, hiring preferences and some charitable donations have satisfied this element. Bribes offered by third-party vendors and agents are often attributed to domestic and publicly traded companies to establish FCPA violations. Thus, international franchisors may be accountable for bribes paid by master and / or regional franchisees and their employees. Finally, the vagueness inherent in the FCPA’s “business” prong also lends itself to broad interpretation. Prosecutors will closely examine any transaction that may influence a foreign official to support the franchisor’s business.

Tips for international franchisors

FCPA enforcement actions often result in prison time for company officials or employees, criminal and civil penalties and severe reputational damage to a company. Comprehensive compliance programs establish a company-wide culture of compliance by instituting protocols and procedures specifically tailored to reduce the risks of corruption. In order to narrowly tailor compliance efforts, an international franchisor must first understand where corrupt foreign officials will interact with its system. To that end, we offer a few tips to keep in mind when focusing your compliance efforts.

  • Know your current and target areas of operation
    Not every international opportunity bears equal risks. China, India and Brazil offer international franchisors huge populations and virtually unlimited potential for brand growth within a single country. At the same time, those countries account for approximately half of all FCPA enforcement actions. Meanwhile, international franchisors seeking to serve similar populations in Western Europe may be forced to enter a dozen or more countries, each having unique franchise laws and regulations.  While the burden of entering multiple markets may be considerable, Western European markets account for only a handful of FCPA investigations.  Your risks will vary depending on the territories you seek to operate in. Focus compliance efforts in countries with the greatest corruption risks.
  • Know your master/regional franchisees and their partners and vendors
    Politically exposed third-parties should be avoided. Master/regional franchisees are a valuable tool when establishing an international brand, but any bribes paid to further the franchisor’s business will be attributed to the franchisor. At times, bribes are considered a cost of doing business in those markets. As a result, international franchisors are at an increased risk that master/regional franchisees will unwittingly violate the FCPA by making illicit payments that they consider normal business transactions.
  • Know your system
    Each brand is different, and each system bears its own risks. Some systems rely on supply arrangements or trade-secret ingredients that require the import of goods from the U.S. and interaction with corrupt customs officials. Others require storefronts that comply with the international franchisor’s design standards, thus necessitating interactions with officials involved in the construction and permitting process. Still others encourage franchisees to win public contracts. Having a thorough understanding of your system’s requirements is vital to designing a compliance system that addresses your high-risk operations.
  • Know how to respond
    International franchisors who become aware of potential FCPA violations must investigate the circumstances. Oftentimes, it is more cost effective and time efficient to vet the credibility of an internal whistle-blower or substantiate suspicious circumstances using in-house counsel and your compliance team, if one exists. Once allegations and suspicions are corroborated, outside counsel should be hired to direct any further investigation.

As the Trump presidency looms on the horizon, international franchisors should implement or revisit their FCPA compliance programs with the above tips in mind.

  1. Interview of Donald Trump, Chairman & President, Trump Organization (May 15, 2012) (available here).  
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The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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