Contributing Lawyers


Cyndee Todgham Cherniak

United States

Susan Kohn Ross


Andrew Hudson

Due Dili- What?

Originally published in the Journal of Commerce -

Customs brokers and importers have long operated under the reasonable care/responsible supervision standards. Exporters and freight forwarders have been required to meet the you cannot self-blind standard. Now, however, we are seeing an ever increasing effort on the part of the U.S. government to apply the concept of due diligence across the board. Here are a few current examples.

Siemens was forced to pay $1.6 billion in worldwide fines in order to settle Foreign Corrupt Practice Act (FCPA) violations (civil and criminal) in the U.S. and elsewhere. The extent of the bribes which were paid were said to involve government officials in countries in Asia, Europe, Africa, the Middle East and the Americas. What was the sin of the mother company? It was the failure to exercise proper supervision and control over its various business units. As a result, those entities made payments which were disguised as legal fees, consulting fees and sales commissions, to name a few popular expense categories. Since these were not legitimate business expenses, Siemens financial statements were wrong and so the value of the company and its shares was affected.

Similarly, Haliburton paid $579 million to settle civil and criminal charges related to FCPA violations. Here, bribes were paid to Nigerian government officials by a joint venture which was formed to obtain in country construction contracts. Again, the mother company - Haliburton - was found liable for lax oversight. It performed due diligence, but not to a high enough standard.

In the Nature’s Sunshine Products case, the FCPA violations arose through the payment of bribes to customs officials in Brazil. NSP made nutritional and personal care products which were reclassified in Brazil so many of the vitamins and supplements became medicines, were more strictly regulated and NSP was having trouble meeting those new requirements. While the activities in question took place in Brazil, NSP was found responsible because it failed to supervise its personnel to keep accurate financial books and records and also due to the failure to have adequate internal controls which would yield proper monitoring.

American Rice involved improper payments made to Haitian customs officials so as to reduce customs duties and sales taxes. The scheme involved using false bills of lading and other documents to reduce by about 1/3 the quantity of rice shipped to the affiliate in Haiti. By so doing, the cost of doing business in Haiti was substantially reduced, and they ended up paying a huge fine for that.

We have seen the same issue arise in the transportation industry. Con-Way paid a $300,000 fine for FCPA violations over payments made in the Philippines to customs officials and officials of state-owned airlines in order to gain favorable treatment which was otherwise improper. Con-Way was held responsible because its Menlo Worldwide subsidiary failed to properly supervise the Philippine operation and Con-Way failed to properly supervise Menlo.

Why care about these misdeeds? Mark Mendelsohn, Deputy Chief, Criminal Division, Dept. of Justice, made some chilling public comments. In addressing the rise in FCPA violations he said the pace of criminal enforcement has increased for each of the last six (6) years. There are 120 on-going investigations and more individuals are being prosecuted than in the past (and in at least a couple of the cases mentioned above, corporate executives were also found to violate the FCPA and paid hefty fines and/or went to jail!). Multi-jurisdictional cases are on the rise . Where there is concurrent jurisdiction among agencies, collaboration is occurring; plus the government is getting more efficient at getting foreign evidence. When an industry is discovered to have a pervasive pattern of corruption, investigations follow. He specifically cited as examples medical devices and customs brokerage/freight forwarding. The bottom line is the government will seek to maximize its impact. The goal is fairness to competitors. Self-disclosure and cooperation are encouraged. Due diligence in transactions is essential.

Mr. Mendelsohn went on to say there is often an overlap between an FCPA investigation and other criminal investigations, e.g. export control, anti-trust, and bribery. Justice and FBI have more resources, yielding specialized talent and so more effective enforcement. Mr. Mendelsohn also made the point that only 35% of the cases result from self-disclosure. The rest are from tips, letters and referrals, including foreign sources and governments. Additionally, the International Affairs office refers cases, but information about cases arises also when foreign governments seek U.S. evidence, or from reports in the general press, as well as from referrals from embassies and FBI attachés, plus State and Commerce guidelines lead to reports and then, of course, there are cases generated out of the intelligence community.

While admittedly his comments arose in the context of FCPA prosecutions and settlements, it was striking to hear him say on two different occasions there was corruption the freight forwarding and customs brokerage industry. Of course, his view of the industry is skewed by the current anti-trust criminal investigation of air freight forwarders wherein the allegation is price fixing in such areas as security, AMS and currency adjustment fees and similar accessorial charges. There are three such investigations, U.S.–Europe, U.S.-Japan and US.–Southern Asia (.e.g. China and Hong Kong), none of which have yet been resolved, although civil fines and court judgments in a class action lawsuit are on the horizon.


Against this backdrop, no one should be surprised that at a recent program representatives from the Office of Foreign Assets Control and Commerce/BIS both again repeated the mantra of the forwarders are the last line of defense when it comes to export license compliance.


So, how is your due diligence program? How are you managing your service providers? Do you know what your business partners are doing? How about your affiliates? divisions? joint venturers? partners?


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