I always welcome questions from compliance and audit professionals, and the following came to me last week: “What type of third party falls under ‘dealer’ for FCPA purposes?”
The compliance officer who posed this question works at a company under settlement with the Justice Department for overseas bribery. He’s building up the company’s third-party oversight program.
At first I asked whether this was a pop quiz. No, he said. He was genuinely unsure of the precise definition.
My instinct was to say any business that buys equipment from your company and others, to resell that equipment itself, would be a dealer. Right? The party is buying and selling, from numerous companies. That fit the image of “wheeling and dealing” in my head, and that’s what dealers do. They wheel and deal.
Hmmm, my compliance officer replied. He would call that a reseller, or maybe a distributor.
The next image that came to mind was a dealer in rare coins. That person would buy coins from one person and then sell them to another — but the dealer isn’t necessarily a broker, arranging a transaction between two parties. Coin dealers buy their supplies from Person A outright. Then they put them out for sale to Person B, with no guarantees on price, time of sale, or anything else.
I also wondered — what’s the substantive difference between a dealer and a reseller, from the compliance officer’s perspective? Don’t you face the same regulatory risks, and therefore you need to apply the same due diligence? Are we just splitting hairs?
Then I made the quip that would, ultimately, answer our question and demonstrate how tricky third-party management can be.
“Then again, a weed dealer only sells, and usually gets his supply from only one source!”
I advised the compliance officer perhaps to avoid that metaphor when raising this issue with the Justice Department, and then went to ponder the question more. (We’re all about service here at Radical Compliance.)
Drug Dealers and FCPA
The next day I was looking for something funny to say on Twitter, so I borrowed my compliance officer’s dilemma and posted the following.
Me, being witty: ‘I’m not sure. Try asking a drug dealer?’
CCO: ‘I already asked mine. He didn’t know either.’
CCO is in Colorado so I don’t know if he’s joking
— Matt Kelly (@compliancememe) August 11, 2019
OK, full disclosure: I embellished that tweet. My compliance officer friend does not live in Colorado. I have no idea whether he smokes weed.
But that shot at wit and humor got an answer! A big thank you to Scott Killingsworth, long-time corporate lawyer in Atlanta and member of the board of governors at the Center for Ethics and Corporate Responsibility at Georgia State. He gave this reply:
Funny! But I think in common business usage dealers are usually retailers and distributors sell to dealers or other distributors.
— Scott Killingsworth (@VSKillingsworth) August 12, 2019
Several others later confirmed to me that Killingsworth’s definition is correct. In that case, the distinction between dealers and distributors can be quite significant for compliance officers.
If distributors only sell to other businesses, they typically have no direct contact with foreign government officials. A dealer, selling to end-use customers, would have that direct contact. So dealers and distributors have different risk profiles, which means your compliance program may need to apply different due diligence and monitoring procedures to each category.
Now, let’s not delude ourselves. In the real world, many distributors will still have contacts with foreign government officials. The distributors may use certain dealers as conduits for bribery, collusion, or other misconduct. In no way do I mean to say distributors are less of a risk than dealers.
Rather, distributors pose a different risk than dealers. They might work with your sales team to concoct some “preferred discount program” to create slush funds for bribes, or otherwise try to manipulate your accounting policies to do the same. Dealers are more likely to be the ones paying the bribes, since they’re in closer contact with the corrupt official.
Anyway, thanks to a quip about weed dealers, we have our answer.
Maybe next time I’m just drop LSD and see if the answer comes to me while I’m tripping.