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Risk Mitigation in the Client Intake Process

This article is the first in a two-part series on risk mitigation. The second part will be featured in our upcoming Risk Assessment & Management issue of the ACC Docket.

I n the wake of the Panama Papers, speculation regarding the potential ties between US President Donald Trump and Russia, and recent blockbuster Federal Corrupt Practices Act (FCPA) settlements, in-house counsel should be highly sensitive to “know your customer” concerns. Heightened attention should also be given to government owned entities as US enforcement agencies continue to interpret the FCPA’s applicability broadly and the financial and reputational risks are high. The number of enforcement actions and the overall amounts paid to resolve them has steadily increased. In 2016, four significant FCPA settlements alone totaled a combined US$1.7 billion.

Recently, regulators have demonstrated an increased focused on conflicts of interest. In October 2016, the Securities Exchange & Commission (SEC) charged the founder of Valentine Capital Asset Management with failing to disclose a conflict of interest when making an investment recommendation, as well as making other misleading statements to his advisory clients. Similarly, Center Partners Management, LLC recently settled with the SEC after it was found that three principals failed to disclose a financial interest in one of the firm’s service providers.

The client intake process is prime for a makeover. Typically a routine check the box affair, in-house counsel can use the opportunity to undertake a robust fact-finding mission to uncover potential risks for a firm. In-house counsel can play an increased role in helping to mitigate risks by focusing on potential conflicts early. The intersection between the typical client intake process and risk management provides a way for in-house counsel to integrate risk management into a process that is likely already occurring in the firm. The earlier potential issues are identified, the less likely crises management procedures will be called into play.

A robust conflicts check process can aid both compliance and legal departments to identify potential conflicts and institute processes to help mitigate them. A typical process should include a review of the existing relationship between the parties and any competing interests, such as the economic or business interests of an employee or board member, or various departments or team. A complete review of the client and the proposed work will aid in checking for reputational risks, as will a check of whether there are any firm restrictions to taking on new business, or whether there are any independence requirements to be met. Lastly, a deeper dive to look for economic interest or government ties is equally important.

In an increasingly digital world where corporate missteps live indefinitely online, it is important for corporations to weigh all the facts in order to protect against reputational risks, as well as operational risks –– and to avoid what can sometimes be the insurmountable task of image rehabilitation. In-house counsel can use the client intake process to identify the opportunity source, any government involvement (which could point to heightened lobbying or FCPA risks), and identify where additional targeted operational instructions or training may be required –– or where specific additional controls may be needed. Identifying these possible conflicts or issues early gives in-house counsel a chance to take steps to abate risks to their firm, rather than attempt to clean up problems after the fact.

Known primarily for two of its main provisions, one that addresses accounting transparency requirements and another concerning bribery of foreign officials, the FCPA has garnered recent press for the increase in the number of violations by companies. A robust intake process could minimize these risks. The anti-bribery provisions of the FCPA make it unlawful for a US person to make a payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person.1 Similarly, there are serious consequences for non-compliance with lobbying laws. The United States, European Union, United Kingdom, Australia, and Canada each have specific lobbying laws. Any contact with government personnel for the purpose of influencing legislation or rule making, including such activity in connection with marketing or procurement matters, may be considered lobbying. Knowing all parties involved in a transaction can help identify areas of risk and dictate whether procedures should be instituted to help mitigate such risks.

During a check for conflicts, noting the client’s location and affiliated entities can enhance a companies’ due diligence, as the United States maintains a list of sanctions against specific countries, companies and people. They are administered by Office of Foreign Assets Control (OFAC) and can be comprehensive or selective. The United States also has detailed export control laws that cover a range of activities including the export of products, services, or information. An export occurs when there is a transfer of controlled commodities, technology, or software out of the United States, or to a non-US person.2 The penalties for export control violations can be severe and can potentially be both criminal and civil in nature. For companies doing work globally, it is important to check that clients are not on the sanctions list, or if there are specific export prohibitions or restrictions. The list of sanctioned countries is not static, but as of date of publication, sanctioned countries include: Cuba, Iran, North Korea, Sudan, and Syria. US sanctions include indirect activities, including supporting a customer’s business activities in a sanctioned country or region, or with an entity of a sanctioned country or region.

The failure to identify and mitigate conflicts of interest put the firm’s reputation at risk and can expose the firm to legal and financial risks. Firms face civil or criminal liability, in addition to the dangers to a firm’s reputation, which could severely impact client relationships. The use of a robust intake process can assist in-house counsel minimize risks to their firm and reduce costs.

For more information on minimizing risk and criminal liability, be sure to read the authors' follow-up article in the upcoming December Risk Assessment & Management issue of the ACC Docket.

1 The FCPA defines a foreign official as “any officer or employee of a foreign government or department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public organization.” 12 Section 30A(f )(1)(A) of the Exchange Act, 15 U.S.C. § 78dd-1(f )(1) (A); 15 U.S.C. §§ 78dd-2(h)(2)(A), 78dd-3(f )(2)(A).
2 The International Traffic in Arms Regulations (ITAR), 22 C.F.R. § 120.17 Export.

About the Authors

Martine-Pascale GaujeanMartine-Pascale Gaujean is an associate general counsel at Promontory Financial Group, LLC, an IBM Company.

Mara ButnersMara Butners is a legal analyst at Promontory Financial Group, LLC, an IBM Company.

The information in any resource collected in this virtual library should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or ACC. These resources are not intended as a definitive statement on the subject addressed. Rather, they are intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.