On Third Party Compliance Management Practices Ⅱ

4、Supervision and Management
Signing a contract containing provisions on compliance is a solid foundation for third party compliance management. In order to effectively control and manage the risk of third party business compliance, MNCs should pay more attention to supervision and management after the signing of the contract.
▼ All Employees’ Compliance of the Third Party
It is usually the case that corruption is recognized when it occurs at the highest levels, but is ignored when it occurs at the lower grassroots level. To ensure that the third party complies with the provisions on compliance, the MNC should supervise the third party to ensure that all its employees and staff related to the performance of the transaction agreement comply with the provisions on compliance, including employees at the grassroots level and contractors. These problems can be illustrated by the following case study.
[Case Study 1]
Company C is a Chinese subsidiary of a US MNC, which mainly engages in the production and sale of raw materials for shoe soles. Company D is a Chinese subsidiary of a European MNC with the business scope of manufacturing and sales of sports shoes and casual shoes, having manufacturing plants in Guangdong and elsewhere in China. According to the global cooperation agreement signed by and between their parent companies, Company C and Company D carry out business cooperation in China, agreeing that Company C supplies the resins for sport shoe soles to Company D. Both parties have conducted commercial compliance due diligence and signed a supply contract containing provisions on compliance. After the signing of the supply contract, the supply contract had been performed well until one day the staff at Company D’s workshop started to request that the sales and customer service staff at Company C pay them "benefits" or "kickbacks" on a regular basis. If their demands were not satisfied, the staff at Company D’s workshop would sabotage the raw materials supplied by Company C, resulting in an increase in the failure rate of Company C’s products.
Company C was alarmed by the situation. Company C tried reporting to Company D’s management regarding the corruption at the grassroots level, and Company D dismissed several contractors following investigations. However, the staff at Company D’s workshop took further intentional actions, resulting in Company C’s failure to perform the contract. Company C then terminated the supply contract following consultation with Company D.
▼ Compliance Training
MNCs should pay close attention to third party compliance training to improve the third party’s awareness and performance of compliance procedures.
In practice, some MNCs include business compliance module courses in the regular training of their dealers and agents. In order to encourage third parties to participate in training, we advise MNCs to take into account the participation rates and assessment results of third parties when deciding whether to renew their transaction agreements and the renewed terms and conditions. Furthermore, through such training the MNC can actively guide qualified third parties to join the same compliance system as the MNC, such as ISO37001. The adoption of the same compliance system is helpful for reducing the costs of the MNC’s third party compliance monitoring.
▼ Compliance Audit
MNCs should pay more attention to compliance audits of third parties, especially third parties graded ‘high-risk’, to examine whether there are any ‘red flags’ or irregularities. Red flags include but are not limited to the following: (1)the actual rate of payment is significantly higher than the amount agreed to in the contract; (2)the company pays cash to a third party frequently or pays a large amount of cash to such third party; (3)a third party pays cash to other institutions or individuals frequently or pays a large amount of cash to such institutions or individuals for transaction purposes; (4)the company pays to other institutions or individuals rather than the third party; (5)a third party or other institution is designated to provide trading services to the company; (6)several service providers with the same functions are engaged in one single transaction with the third party; and (7)a third party asks to change the transaction business service model.
MNCs should be wary of collusion between their employees and third parties using contract loopholes to avoid audits.
[Case Study 2]
Company E is a Chinese subsidiary of a US MNC, one of whose businesses is manufacturing and selling detection equipment for underground safety production. Company F is a trading company located in North China, and a subsidiary of a large state-owned mining enterprise group. Company F is responsible for the procurement of safe production equipment for the state-owned enterprise. For the purposes of Company E's supply of safety inspection equipment to Company F, Company E conducted a commercial compliance due diligence on Company F, and included typical provisions on compliance in the supply contract. Two years after the execution of the supply contract, Company E received a notice from Company F, requiring Company E to co-bid with Company G, an affiliated company of Company F, for the state-owned enterprise group’s new supply project of mining equipment. According to the supply contract, Company F has the right to transfer all or part of the rights under the contract to its affiliated company. Sales managers of Company E quoted such provisions of the supply contract, and using the deadline for submission of bids as a justification, demanded that the legal compliance department of Company E to agree to co-bid without conducting due diligence on Company G…The legal compliance department of Company E, under pressure, persisted to conduct a quick due diligence investigation of Company G, finding that Company G was suspected to be a “shell company” newly established and was not qualified to bid due to deficiencies in registered capital, technical staff and other aspects… Further investigation conducted by the legal compliance department of Company E showed that Company G may have been established by some senior managers of Company F and the sales managers of Company E. By these means, they attempted to fraudulently portray Company G as Company F’s affiliated company, and to bid with Company E for the state-owned enterprise’s procurement projects. Moreover, the principals of Company G were planning to bribe the leaders of the state-owned enterprise group to win the bid.
In this case, if Company E agreed to co-bid with Company G, it would be commercial bribery and a conflict of interest between the personnel of Company F and Company E. Company E would have been implicated due to the Company G’s bribery of the state-owned enterprise group, and subject to FCPA punishment. However, in this case, the prudence and vigilance of Company E's legal compliance department prevented commercial bribery and corruption from taking place.