Retailers and Manufacturers: Avoid Costly Logistics Pitfalls Suffered by Avon and Ralph Lauren Retailers and Manufacturers: Avoid Costly Logistics Pitfalls Suffered by Avon and Ralph Lauren

Retailers and Manufacturers: Avoid Costly Logistics Pitfalls Suffered by Avon and Ralph Lauren

In May, Avon announced that it reached a Foreign Corrupt Practices Act settlement with the DOJ and the SEC for $135 million for allegedly violating FCPA's books and records and internal control provisions. Avon's Chinese subsidiary will plead guilty to violating the books and records provisions of the FCPA. In addition, the company will enter a deferred prosecution agreement and will have a compliance monitor for a year and a half.  This settlement marks an end to a nearly eight-year-long internal investigation that was sparked by a whistle-blower complaint.
 
Avon is not alone.  Recent developments show that the lack of controls around key business processes such as import and customs business processes have come at a multi-million dollar cost to some U.S. retailers and manufacturers.  
 
Last year, Ralph Lauren settled its FCPA charges for $1.6 million dollars for employing a broker that bribed Argentinian government officials to avoid customs requirements.  Ralph Lauren admitted that it lacked a compliance and internal control environment in its subsidiary. 
 
Outsourcing import/export and customs functions may get rid of many business headaches, but it does not itself outsource the FCPA related liability.  The SEC and DOJ are increasing their enforcement efforts of the FCPA's accounting provisions, which in part requires the issuers to devise and maintain internal accounting controls.  Building strong controls surrounding customs processes not only increases the likelihood of compliance with the FCPA's accounting provision, but it also mitigates the risk of the actual bribery itself.  The importance of internal controls in a company's import/export department cannot be overstated. 
 
But devising these internal controls is not as simple as it sounds.  The FCPA does not require specific controls to be implemented.  The Act only requires that "every issuer …shall…devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance" of management's control, authority and responsibility over the firm's assets.  It further defines "reasonable assurance" as "such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs."  This broad, non-specific requirement has posed challenges for FCPA compliance officers.
 
While the DOJ has issued several legal opinions on the FCPA's bribery provision, it has not weighed in on this accounting provision.  Unsurprisingly, this has resulted in a lack of practical guidance.  The sole court decision on this topic cannot make this point any clearer. According to the court, “The main problem with the internal accounting controls provision of the FCPA is that there are no specific standards by which to evaluate the sufficiency of controls; any evaluation is inevitably a highly subjective process in which knowledgeable individuals can arrive at totally different conclusions."
 
It is this subjectivity which makes the design, implementation and monitoring of internal controls so difficult.   However, a company can benefit from using sound judgment during the risk analysis – the first step in devising internal controls.  At this stage, both legal counsel and the internal audit team must work together to confront the internal control challenges.  A little time and investment up front can make the difference between guilt and innocence, and save the company its reputation along with millions in potential liability.
 
FCPA risk assessment checklist
Here are some points to consider when assessing FCPA risk exposure surrounding importation of merchandise in a foreign country. 
 
1. Susceptibility to noncompliance risk.  The first step is to analyze the tendency for noncompliance with a foreign country's import regulations. In addition, one must consider the integrity of a foreign country's customs officers.  Examples of questions to ask are:
 
·         What are the corruption risk levels of both the importing and the exporting country and the nature of the goods? What are the incentives and penalties to make false representations/declarations?
·         Are the customs requirements so cumbersome or complex that failure to comply is foreseeable?
·         Does the activity occur with a high frequency, and it is performed by a single employee/broker?
 
2.  Symptoms of noncompliance.  No assessment (let alone a resolution) of a problem is possible without first noticing its symptoms.  This is no different in the customs compliance world.  Company management should consider these red flags:
 
·         Employee turnover in key positions related to customs business functions;
·         No formal internal controls or deficient internal controls;
·         No oversight of customs brokers and other agents;
·         No formal training for customs personnel responsible for reporting unusual incidents;
·         Prior adverse history surrounding custom related problems.
 
3. Support by management to foster compliance.  A sound risk assessment needed to develop efficient internal controls will not be possible without consideration of this factor.   The company should assess how likely its management is to make a commitment to customs-related internal controls.  Here are some questions to ask:
 
·         Do management personnel have the ability and authority to report custom violations and problems?
·         Can the company's employee incentives/rewards affect duties?
·         Do the employees have the requisite knowledge about customs regulations?
·         Are employees periodically trained/reminded about FCPA compliance?
·         Have there been compliance problems repeatedly identified in audits?
·         Are there adequate segregation of duties among various positions in the import department?
·         Do employees rotate among their respective job functions?
 
Managing FCPA liability
A global retailer or manufacturer cannot ignore the FCPA risks related to importation of its products.  Implementation of strong accounting controls is imperative to manage FCPA liability.  This cannot be achieved without performing a thorough risk analysis of the customs environment in the foreign country.  A deeper understanding of such risks can be gauged by considerations of multiple factors outlined in this article, which should be carried out by proactive cross functional department personnel in legal, accounting and compliance roles.
 
If you have any questions or need information, please contact a member of Ice Miller's Government Enforcement, Internal Investigations, and Corporate Compliance Group

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances. 
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