Day 21 of One Month to More Effective Compliance for Business Ventures

Most franchisors have thorough financial vetting requirements before allowing any person or business to become a franchisee. However, how many of these same businesses perform compliance due diligence on their prospective overseas franchises? How many US franchisors have compliance training programs? How many evaluate, on an ongoing basis, the compliance program of their overseas franchisees? How many US franchisors have a compliance hotline or other reporting mechanism for any compliance violations made against their franchisees? 
Another way to look at this issue comes from Aaron Murphy in his book, entitled “Foreign Corrupt Practices Act – A Practical Resource for Managers and Executives”. In a chapter entitled “You Do More With the Government Than You Think”, Murphy has several examples of how any US company doing business overseas will come into contact with a foreign governmental official and, thereby, create a possible FCPA liability. Many of these are areas which a US based franchisor would have to utilize to do business in a foreign country, including some or all of the following: 
Interactions with Customs Officials. Every time your company sends raw materials into, or brings them out of, a country there is an interaction with a foreign governmental official in the form of a customs official. Every customs transaction involves a payment to a foreign government and every transaction involves some form of a foreign governmental regulatory process. While the individual payment per transaction can be small, the amount of total transactions can be quite high, if a large volume of goods are being imported into a foreign country.
Interaction with Tax Officials. While interacting with international tax authorities can present problems similar to those with customs officials, the stakes can often be much higher since tax transactions may be less in frequency but higher in financial risk. These types of risks include the valuation of raw materials for VAT purposes before such materials are incorporated into a final product, or the lack of segregation between goods to be sold on the foreign country’s domestic market as opposed to those which may be shipped through a free trade zone for sale outside that country’s domestic market.
Licensing and Permits. Your company is a retail seller of clothes and cosmetics, franchises its operations outside the US and you do not understand how the FCPA applies to your foreign sales operations? Every physical location that you sell your goods in will require some type of license to operate your business. It could require multiple licenses such as a national license, state license and local municipal license, additionally you will need a building permit if you intend to build out or modify your retail stores.
Work Permits and Visas. If your company franchises overseas it will have to send someone from the home office to operate in-country at some point. In the post-9/11 world this probably means that, at a minimum, your company will have to obtain a visa for each employee who enters the foreign country and perhaps a work permit as well. The visa process can start in the United States with a trip to foreign government consulate or even the embassy and at that point you are dealing with a foreign governmental official. The work permit process can also begin in the United States but often may continue in the foreign country.
Inspections and Certifications. Consider the Tex-Mex restaurant chain that desires to take this cuisine across the world. In any city in the world there will be some type of certification process to enable to the business to set up and start operating and then there will be the need for ongoing inspections for sanitary conditions. Such inspections may be rare but if there is “slime in the ice machine” it may be grounds to close the restaurant. 
How would all of this play out for a franchisor? As a franchisor moves into foreign markets there could well be the temptation to “grease the skids” and make payments or offer gifts to government officials, or their family members, to get the permits or permissions necessary to open and operate. In many countries, bribery is a common way of getting business done, and there can be tremendous pressure from local agents or franchisee candidates to follow regional customs and use bribes to become or remain competitive. Even if it is not the US franchisor's own employees that engage in the FCPA violations, the US franchisor will still face the risk of an enforcement action if the franchisee’s employees engage in such conduct. 
Three Key Takeaways
Franchises can bring an unexpected level of FCPA exposure.
Franchisors must have more than financial vetting for potential franchisees.
Use your compliance tool kit for business ventures in managing the FCPA risk for franchises.
This month’s podcast series is sponsored by Michael Volkov and The Volkov Law Group.  The Volkov Law Group is a premier law firm specializing in corporate ethics and compliance, internal investigations and white collar defense.  For more information and to discuss practical solutions to compliance and enforcement issues, email Michael Volkov at mvolkov@volkovlaw.com or check out www.volkovlaw.com.