Guidelines on reputational due diligence

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1 Guidelines on reputational due diligence Report No. 356 September 20042 P ublications Global experience The Internatio...

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Guidelines on reputational due diligence

Report No. 356 September 2004

P

ublications

Global experience The International Association of Oil & Gas Producers has access to a wealth of technical knowledge and experience with its members operating around the world in many different terrains. We collate and distil this valuable knowledge for the industry to use as guidelines for good practice by individual members.

Consistent high quality database and guidelines Our overall aim is to ensure a consistent approach to training, management and best practice throughout the world. The oil and gas exploration and production industry recognises the need to develop consistent databases and records in certain fields. The OGP’s members are encouraged to use the guidelines as a starting point for their operations or to supplement their own policies and regulations which may apply locally.

Internationally recognised source of industry information Many of our guidelines have been recognised and used by international authorities and safety and environmental bodies. Requests come from governments and non-government organisations around the world as well as from non-member companies.

Disclaimer Whilst every eff ort has been made to ensure the accuracy of the information contained in this publication, neither the OGP nor any of its members past present or future warrants its accuracy or will, regardless of its or their negligence, assume liability for any foreseeable or unforeseeable use made thereof, which liability is hereby excluded. Consequently, such use is at the recipient’s own risk on the basis that any use by the recipient constitutes agreement to the terms of this disclaimer. The recipient is obliged to inform any subsequent recipient of such terms.

Copyright OGP All rights are reserved. Material may not be copied, reproduced, republished, downloaded, stored in any retrieval system, posted, broadcast or transmitted in any form in any way or by any means except for your own personal non-commercial home use. Any other use requires the prior written permission of the OGP. These Terms and Conditions shall be governed by and construed in accordance with the laws of England and Wales. Disputes arising here from shall be exclusively subject to the jurisdiction of the courts of England and Wales.

Guidelines on reputational due diligence Report No: 356 September 2004

Acknowledgements This guideline was produced for Members of the International Association of Oil & Gas Producers by the Anti-corruption Subcommittee.

Subcommittee members: Genevieve Laffly Murphy

API

Jack Lynch

BP

Kit Armstrong

ChevronTexaco

Stuart Brooks

ChevronTexaco

Raphael Vermeir

ConocoPhillips

Valentina Ferri

ENI

Laurence Fry

ENI

Judith Tocher

ENSCO

Nick Boydell

ExxonMobil

Paul Fenby

ExxonMobil

Anne McAdams

ExxonMobil

Sophie Depraz

IPIECA

Erik Andreasen

Mærsk

Anna Hensel

Marathon

Sverre Bjerkomp

Norsk Hydro

Odd Robberstad

Norsk Hydro

John Campbell

OGP

Alan Grant

OGP

Lloyd Slater

OGP

Michaela Reeh

OMV

Olayinka Ilori

Schlumberger

Albert Wong

Shell

Atle Andreassen

Statoil

David Platts

Statoil

Malcolm Webb

UKOOA

Chairman

Table of contents Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 I

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

II

Pressure from all sides . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

III

Roles & risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

IV

Purpose, process & product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

V

Selection of associate or employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

VI

Base information collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

VII Pre-contract verification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 VIII In-house research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 IX

Assessment and resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

X

Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

XI

Safeguards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

XII Integrity management of the relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 XIII Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 XIV Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Appendices Appendix 1 Sample documents 1.1 Potential associate: letter of authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Potential employee: letter of authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Potential associate: information to be requested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Potential employee: personal details for an employment application form . . . . . . . . . . . . . . . Appendix 2 Red flags . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix 3 Due diligence & offshore companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Definitions The following words are defined in the context of these guidelines: Associate Intermediary Partner Supplier Employee Foreign Official

OR:

Official

Due diligence

Public corruption

Private corruption

Fiduciary relationship

He

2

Partner, co-venturer or supplier. Agent, representative, consultant, distributor. Co-owner of a business enterprise, with defined rights and obligations. Provider of goods or services, including contractors. Individual hired directly by a principal on a contract of employment. The Foreign Corrupt Practices Act defines the term “foreign official” as: “Any officer or employee of a foreign government or any 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 international organization.” “Any agent, officer, or employee (elected, appointed or career) of (1) a government or any department or agency of a government at the federal, regional or local level; (2) a political party or candidate for political office; (3) any company in which a government holds a substantial ownership interest; or (4) a public international organisation such as the World Bank, the United Nations or the International Monetary Fund. The process involved in: (a) researching potential associates and employees in order to identify and deal with ethical risks or areas of uncertainty; (b) integrity management of the on-going business relationship. An act done with the intention of giving some advantage inconsistent with a public offical’s duties. Such acts include the misuse of a public official’s position in order to procure some benefit for oneself or for another as well as acts intended to induce a public official to misuse his or her position or character. An act done with the intention of giving some advantage inconsistent with the rights of others. Such acts include the misuse of a position arising from a fidiuciary relationship in order to procure some benefit for oneself or for another who is not an intended beneficiary of the fiduciary relationship as well as acts intended to induce another to misuse his or her positon arising from a fiduciary relationship. One founded on the trust or confidence placed by one person in the integrity and fidelity of another which gives rise to a duty to act primarily for the other’s benefit in matters arising out of and from that relationship. For purposes of these guidelines, both employees and intermediaries will be considered as having such a relationship with their employer/principal. In reference to associate, “he” also refers to she, they or it.

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Guidelines on reputational due diligence

I Introduction The point at which companies interact with others in the pursuit of business represents both opportunity and risk: • Opportunity — because the other party may provide additional resources, valuable knowledge, assistance or access to business and markets, which might not otherwise be available; • Risk — because companies, relying on associates or employees unfamiliar to them and who have not carried out appropriate due diligence research, may unwittingly suffer the consequences of undesirable practice or “harm by association”. The risk increases when the operation takes place in new, hazardous or uncertain environments, or when the business relationship is not underpinned by effective controls, mutual understanding or clear agreements. Companies are more vulnerable when knowledge of their associates and employees is poor. Those who have carried out the appropriate due diligence process on associates, employees and business environments will be better positioned to identify areas of risk and reduce the likelihood of corrupt practice and reputational damage. Additionally, in certain circumstances, proof of having conducted appropriate due diligence research might be successfully used in a court of law. While companies cannot guarantee that improper conduct will never occur, they can take reasonable precautions to prevent it by use of appropriate due diligence and effective risk management. Where the risks are internal (employees and certain types of intermediaries), many risks may be mitigated by effective internal controls. Where the risks are external (nonrelated business associates), the parties may be able to limit their liabilities to one another through mutual undertakings. In hybrid situations (joint ventures), a variety of controls and limitations on liability may be appropriate. Corruption within the context of these guidelines includes both the public and private sector. While the bribery of government and state officials remains a serious concern, it must be recognised that corrupt practice can and does also occur entirely within the private sector. These guidelines are designed as a resource for companies intending to establish and/or maintain effective anti-corruption practices. These include evaluation of the potential risks of doing business with associates and implementation of measures to reduce those risks. It sets out to provide guidelines on designing and conducting due diligence procedures and establishing a framework for in-house programmes. Members can adapt the guidelines to fit the particular needs and circumstances of their own organisation. While every care has been taken to render an accurate interpretation of current legislation, the information in these guidelines is not provided as professional legal opinion. Advice should always be sought from qualified legal counsel.

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II

Pressure from all sides

Legislation The US Foreign Corrupt Practices Act (FCPA) and the OECD Convention on Combating Bribery are the two best known and widest ranging pieces of anti-corruption legislation. They have direct consequences for companies publicly listed in the United States or registered in one of the countries which have implemented legislation based on the OECD convention. Most OGP member companies fall under the umbrella of at least one of these documents. The documents are broadly similar and both prohibit the bribery of foreign officials, either directly or through third parties, for the purpose of obtaining or keeping business.

The Foreign Corrupt Practices Act In the 1970s, US Securities Exchange Commission (SEC) investigations led to a large number of US companies admitting the payment of over US$300 million to overseas government officials, politicians and political parties. These payments were either illegal or highly questionable and were made to secure some greater or lesser form of commercial advantage. The payments varied in scale from large bribes paid to a highly placed government official to payments of a type known as “facilitating payments” made to ensure that a minor functionary carried out his normal duties in a more timely fashion. The FCPA was passed by Congress in 1977 in an attempt to prevent this bribery of foreign officials. The anti-bribery provisions of the FCPA make it illegal to bribe foreign officials to obtain or retain business or to direct business to a specific person. These provisions apply to certain issuers of registered securities and issuers required to file periodic reports with the SEC. They also apply to US “domestic concerns” (basically an organisation which has its principal place of business in the US). The anti-bribery provisions prohibit bribes paid directly by a company and, under certain circumstances, may hold a company liable for bribes paid by an intermediary. It is considered unlawful to make a payment to an intermediary “knowing” that all or part of the payment will be used as a bribe to a foreign official. “Knowing” is defined to include “being aware of a high probability of the existence of such circumstances”. The US Congressional Record accompanying the statute states that actions which indicate “conscious disregard” and “wilful blindness” may also constitute knowledge. Facilitating payments for the performance of “routine governmental action” are excluded from the provisions. Examples of these routine governmental actions have been given by the US Department of Justice and are: “obtaining permits, licences, or other official documents; processing governmental papers, such as visas and work orders; providing police protection, mail pick-up and delivery; providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products; and scheduling inspections associated with contract performance or transit of goods across country.” Criminal penalties for violations of the anti-bribery provisions are: • For corporations or other business entities – a fine of up to US$2 million, • For officers, directors, stockholders, employees or agents – a fine of up to US$100,000 and imprisonment for up to 5 years. Under the Alternative Fines Act these fines may be much higher, however. The actual fine may be up to twice the benefit that the defendant sought to make by the corrupt payment. Fines imposed on individuals may not be paid by their employer or principal. The US Department of Justice and Department of Commerce have jointly produced a brochure that provides a general description of the FCPA anti-bribery provisions. The brochure includes specific comments on third party payments. It states: “to avoid being held liable for corrupt third party payments, US companies are encouraged to exercise due diligence and

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take all necessary precautions to ensure they have formed a business relationship with reputable and qualified partners and representatives”. The expectation upon companies to carry out some form of screening is therefore implicit. Those who fail to establish commensurate programmes may find mitigation difficult in the event of a prosecution under this or similar laws.

The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Following the enactment of the FCPA, US Congress became concerned that American companies would be disadvantaged in international trade by foreign companies who were prepared to pay bribes that in some countries were even allowable as business expenses for tax purposes. In 1988, negotiations began between the US authorities and the major trading partners of the US who were members of the OECD to obtain agreement to implement laws in their own countries similar to the FCPA. In 1997, the US and 33 other nations signed the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. By the end of 2002, all but one of those nations had implemented and were enforcing similar legislation to the FCPA. To judge the similarity of the OECD Convention to the FCPA, Article 1 of the Convention states: “1. Each party shall take such measures as may be necessary to establish that it is a criminal offence under its law for any person intentionally to offer, promise or give any undue pecuniary or other advantage, whether directly or through intermediaries, to a foreign public official, for that official or for a third party, in order that the official act or refrain from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business.”

Other conventions Two other Conventions in the 1990s responded to the calls for legislation to curb corruption. These included articles of a similar nature to those in the FCPA, eg, deterrents to the bribery of domestic and foreign government officials. On 29 March 1996, 34 of the member states of the Organization of American States (OAS) signed the Inter-American Convention against Corruption. Article VI 1 of the treaty describes in some detail acts of corruption involving the solicitation or acceptance by a government official and the offering and granting (directly or indirectly) to such an official of any article of monetary value or other benefit in exchange for any act or omission in the performance of his public functions. This can quite clearly be compared to the FCPA. On 27 January 1999, 41 member states of the Council of Europe signed the Criminal Law Convention on Corruption. Chapter II, Article 2 of the convention requires each signatory to implement legislation to criminalize the promising or offering of any undue advantage to any of its public officials for him or her to act or refrain from acting in the exercise of his or her functions. Article 3 of that chapter requires legislation to criminalise the request or receipt by any public official of any undue advantage for similar actions. Article 5 of the same chapter covers bribery of foreign officials and states: “Each Party shall adopt such legislative and other measures as may be necessary to establish as criminal offences under its domestic law the conduct as referred to in Articles 2 and 3, when involving a public official of any other State.”

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In December 2003, the United Nations General Assembly adopted the UN Convention Against Corruption and issued the following description of this new global instrument: “The Convention introduces a comprehensive set of standards, measures and rules that all countries can apply, in order to strengthen their legal and regulatory regimes to fight corruption. It calls for preventive measures and the criminalization of the most prevalent forms of corruption in both public and private sectors. And it makes a major breakthrough by requiring Member States to return assets obtained through corruption to the country from which they were stolen. These provisions – the first of their kind – introduce a new fundamental principle, as well as a framework for stronger cooperation between States to prevent, detect, and return the proceeds of corruption. Corrupt officials will in future find fewer ways to hide their illicit gains. This is a particularly important issue for many developing countries where corrupt high officials have plundered the national wealth, and where new governments badly need resources to reconstruct and rehabilitate their societies.”

Sarbanes-Oxley Act of 2002 The recent history of serious accounting malpractice by several large companies in the United States has led to the passing by the US Congress of the Sarbanes-Oxley Act. This requires, among other things, CEOs and CFOs to take responsibility on behalf of their company for the validity of financial reports, the effectiveness of internal controls and for full disclosure of any deficiencies in internal controls or known fraudulent activity to the company auditors and the audit committee. Companies are also expected to have in place mechanisms by which employees are protected when they report unethical or illegal practices to the authorities (so-called “whistle-blowing” channels). As with the FCPA, this act is limited to any company publicly listed in the USA. However, many European countries are revising their own reporting and governance requirements for companies along similar lines.

Stakeholders Companies also face relentless pressure from the media, interest groups, NGOs, shareholders and employees to maintain ever-higher standards of probity and for executives to take personal responsibility for serious governance failings. Today, few corporate policy portfolios are complete without a document on business principles. The challenge for companies is to effectively practice what they preach. Addressing reputational risk is one important step towards achieving that objective.

Transparency International Transparency International (TI) principles provide a framework for companies of all sizes to commit to a policy of no bribery and to the establishment of a programme to counter bribery. In addressing business relationships, TI underlines the necessity for due diligence. See http://www.transparency.org.

The bottom line Conducting due diligence on potential associates and employees should not be regarded as anything extraordinary. Rather, it reflects sound governance and forms an integral part of the risk-management process undertaken by a prudent and responsible operator. Due diligence also makes good business sense. If it reduces ethical risk and reinforces good practice, then it will also help to safeguard reputation, increase opportunity and protect stakeholders’ interests. Moreover, in certain circumstances, proof of having conducted appropriate due diligence research might be successfully used in a court of law.

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III

Roles & risks

Roles Associates, intermediaries, partners, and employees all play important roles in helping companies to achieve success in environments where social, economic, cultural and political factors may present a maze of obstacles to those unfamiliar with the language, community and culture. However, the obligations owed to the company will depend upon the role being played: The most effective will help to navigate the company through this maze. They can identify opportunities and trends, open up local markets to company products and services, and provide access to decision-makers, while promoting the company’s image and safeguarding its integrity. Generally speaking, joint venture associates and suppliers are independent businesses responsible for managing their own affairs even when providing services, supplies or resources to the company. A prudent company expects these independent entities to act in their own self interest and will take appropriate precautions to protect its own interests in those situations where conflicts could arise. Where the company and associates are co-investors in another entity, the authority of any investor to act for or on behalf of the joint venture is usually negotiated and agreed upon in advance. Employees and intermediaries are generally considered to be within the control of the company or principal that employs them and anything they do within the course and scope of their employment or representation will generally be attributed to their employer/principal. Within the course and scope of their duties, employees and intermediaries are also expected to act primarily for the benefit of their employer/principal. As a rule, the employer/principal places greater trust in its employees and intermediaries than it does in its business associates. Therefore, the reputational and legal risks arising out of the activities of employees and intermediaries are usually greater than those arising out of the activities of business associates. Employing local businesses and staff is highly desirable from the perspectives of management, business development, cost and knowledge. It also addresses corporate social responsibility by creating employment and helping to develop local economies.

Risks In designing a due diligence process, one of the first challenges is to assess the risk presented by association with a particular third party, ie whether that associate will be likely to create potential liability for the company as the relationship progresses. For those associates judged to present little risk, due diligence may not be necessary. For others, the level of risk may require significant due diligence to assess whether to proceed with a business relationship. The level of due diligence necessary will vary with the particular circumstances and will require some judgement. The major risk areas in partnerships and joint ventures, especially those involving foreign partners, are disagreements over hidden differences, misunderstandings, concealed information, ulterior motives, or failure to comply with applicable laws. Any of these may ultimately lead to a difficult and expensive termination of the agreement and potential liability for the company. Partnerships and joint ventures with offshore companies require particular caution (see Appendix 3) National laws sometimes require that a foreign principal operate in partnership with a local organisation or individual. It also makes practical sense to use a partner familiar with the language, culture and business environment. Many local entities that might be appropri-

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International Association of Oil & Gas Producers

ate for this purpose will be unknown to the company and will require some due diligence efforts. Risks may arise for a variety of reasons. Vested interests may lead to unethical practice or breaches of the law. In some business environments corruption is endemic, and unethical activity is more likely to occur as a matter of course. Inappropriate activity by one partner may, under certain circumstances, expose the other to risk, if only through association. Furthermore, mutual ignorance of corporate policies and national legislation could result in a lack of recognition of unethical conduct by either party.

Knowledge and due diligence Due diligence may also provide protection in jurisdictions where violation of the law does not require actual knowledge of the prohibited conduct (eg where ‘deliberate ignorance’ or ‘wilful blindness’ of culpable conduct or suspicious circumstances may be interpreted as knowledge of the events). While not an affirmative defence, demonstrating that all third party relationships have been subject to thorough due diligence can substantially mitigate the presumption of knowledge.

Common levels of risk The amount of due diligence undertaken should be appropriate to the probable risk of corruption. Associates or intermediaries that are well-established multi-nationals with shares traded on a regulated stock exchange or with headquarters in a country with strong, wellenforced anticorruption laws should have established internal controls and risk management strategies. Similarly, associates well known to the company for their ethical and law-abiding practices should present little corruption risk. While employees may be a company’s most valuable asset, they can also be the source of greatest risk. Fraud and corruption surveys consistently reveal that employees are involved in over 70% of reported cases. The reasons for their involvement are not always straightforward. Opportunity, ignorance, pressure, resentment, poor controls and bad management are just some of the factors that may generate unethical or criminal behaviour. What is clear is that employees are often well placed to engage in fraudulent or corrupt practices. Therefore, when employing staff at any level, it is sensible to carry out at least basic checks to verify qualifications, employment history and character. The selection and appointment or promotion of staff to key positions requires particular care and may demand greater depth and scope in the pre-employment verification process. The due diligence process or the information gathered by that process may also prove effective in some employment law disputes

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IV

Purpose, process & product

Purpose The due diligence process is designed to assist decision-making by assessing the potential risk of conducting business with a particular associate or employee. The purpose of conducting due diligence prior to entering into a business relationship is to develop a reasonable objective basis upon which company management can proceed in good faith that the associate will not make improper payments to government officials or commit other illegal or unethical acts in the performance of company business. It is particularly applicable when contemplating business relationships with previously unknown parties, or when considering mergers, acquisitions or business in new markets where dependence upon others is likely to be greater. The due diligence process should be completed before commencement of the business, whether that is in a newly merged company, a purchased company or opening up a new market.

Process The process should include the following elements: • Selection of associate or employee from among a field of all reasonable alternatives – through initial risk assessment and screening. (Section V). • Development of research scope. This should be custom-built for each individual situation. (Section VI) • Base information collection and verification. This should include the decision as to the parties chosen to carry out the tasks. (Sections VI, VII and VIII) • Assessment and resolution,culminating in the recommendation report to management. (Section IX) • Proper documentation and records. (Section X) • Safeguards, including strong ethical provisions in the contract. (Section XI) • Integrity management of the business relationship to ensure the maintenance of longerterm commitment to the required ethical policies and standards by the associate or employee. (Section XII)

Product The process seeks to acquire all available, relevant information on the potential associate or employee and to ensure a basis of integrity for any subsequent relationship. The research and verification process should enable the following to be described in the recommendation report to management: • Positive and negative aspects of the proposed solution. • An assessment of the risks.

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V Selection of associate or employee Whether the decision is to use an associate or an employee, every company should have a process in place to identify the best-qualified service provider or individual for a particular business transaction. An evaluation of the relevant market is essential to make a recommendation to management. The reasons for making the selection should be documented. The process should include an initial screening of the prospective associate’s reputation for quality work and compliance with law. This helps assess the risk to which the company could become exposed for that prospective associate’s actions. For example, such selection process normally would include consideration of the potential associate’s qualifications for the job or arrangement, his past performance of similar tasks and his reputation for ethical conduct. The nature and extent of the screening are matters of judgement. Relatively little screening may be indicated for a large, publicly- traded company incorporated in the U.S., U.K., Canada, or other countries with a reputation for strong anti-corruption laws. Similarly, little screening may be indicated for an established multi-national company that is known to be well qualified, enjoys a good reputation in the relevant business community and has a good track record for performance and ethical conduct. On the other hand, more extensive screening will be appropriate for a prospective business associate not well known to the company.

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VI

Base information collection

Once the initial screening has taken place and the business justification for the short-list has been approved, the next stage is to decide the extent of due diligence research required for each prospective associate. This will require the judgment of persons familiar with the due diligence process and the applicable laws. As discussed above in section 5, some prospective associates will require more scrutiny than others. For example, in the case of prospective associates judged to present potential risk, it would be wise to thoroughly research their reputations, qualifications, background and past performance. The process should be explained fully to the parties in question in order to obtain their understanding and co-operation. The explanation should include the fact that independent external research will be carried out and a formal letter of authorisation, to be used when researching internally and externally, may be requested from the candidate (company or individual). Standard letters of authorisation are included in Appendix 1 as Document 1.1 in respect of potential associates and Document 1.2 in respect of potential employees. The process of collecting information begins with requesting the prospective associate or employee to provide basic information. This can be done by asking them to complete a questionnaire or by a personal interview. Sufficient information should be obtained to allow for an informed decision. The information sought from candidates may cover some or all of the following:

Potential associate • Ownership information, corporate structure, place of incorporation and names of officers and directors: Apart from the obvious contact names, locations, phone numbers, this should include CVs of officers and key personnel, organisation charts, composition of boards and higher level committees, etc. If the organisation is a company, the place of incorporation and status of the company should be given (eg, publicly traded, limited liability, etc.). Ownership interests in the company should also be given with company registration details of the parent company and ultimate holding company (if any). A description of the company including a brief history should be sought. • Ownership and interests in other organisations: This should indicate interests of the company, key management personnel and their immediate families, in other business organisations that might result in conflicts of interest. • Business, government and political affiliations: The potential associate should provide details of business, government and political affiliations of the company, key management personnel and their immediate families, including any relationship with a Government Official. Due consideration needs to be given to local laws protecting privacy. Sometimes in countries with unstable political regimes, a confidentiality agreement may prove effective in affording comfort to a prospective associate providing details of political affiliations. • Business and financial references: The company or individual associate should be asked to provide business and financial references. Business references should be capable of verification and the candidate should be requested to notify referees of this fact. Obtaining audited financial statements for the previous two years is advisable. In the absence of audited accounts for the current year, unaudited accounts certified by senior management may be accepted. The standard terms of business, if any, of the associate should be requested together with instructions that will be required for invoice payment. • Legal disclosures: Information should be sought regarding any involvement by the company or key management personnel in previous insolvency proceedings, criminal convictions or investigations, or civil litigation (previous, pending or potential, in all cases). • Compensation: Local market rates should be obtained for the goods or services to be supplied and compared with the quoted rates from the prospective associate.

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Information to be requested from a potential associate is included in Appendix I, document 1.3.

Potential employee • Personal data and that of immediate family: A current CV of the potential employee should be provided and this must include qualifications, previous posts, home as well as office address, date and place of birth, nationality, family details. Supporting documentation for qualifications should be requested (originals, if possible), together with passport, visas, residency documents, work permits, etc., if the individual is not a native of the business location (originals). It is advisable to take photocopies of all this documentation, which may prove useful if legal disputes arise either in respect of employment difficulties with the individual or with local employment authorities. • Ownership and interests in organisations: Information concerning the ownership or interests in companies or other organisations by the individual or close family members is essential to assess the potential for conflicts of interest. • Business, government and political affiliations: The nature and extent of all business, government and political affiliations of the individual and close members of his family should be fully disclosed. The consequences of failure to disclose such details should be explained carefully to the potential employee at this stage. Due consideration needs to be given in countries with unstable political regimes where details of political affiliations may be refused for security reasons. • Employment and financial references: References should be sought from at least the two latest employers (more, if there have been short-term posts in the two latest periods of employment), together with a banker’s reference. Candidates should be asked to make referees aware that they are likely to be contacted for verification. • Legal disclosures: Information should be sought regarding any involvement by the individual in bankruptcy or other insolvency arrangements, criminal convictions or civil litigation (current, pending or potential, in all cases). Convictions for driving offences should only be recorded if serious or if the services to be provided relate to driving. • Compensation: The salary package will normally have been fixed beforehand by the company and may be related to other similar posts. Enquiries should be made of the potential employee regarding last salary and benefits earned. This will prevent embarrassment at a later stage if there is a significant discrepancy between the package offered and the latest salary level. Many countries strictly regulate the kinds of personal information that may be acquired, processed or stored. As mentioned in the Introduction, companies should consult qualified legal counsel before proceeding with such due diligence. Personal details to be requested on an employment application form included in Appendix 1, document 1.4

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VII Pre-contract verification The external stage of research involves verifying and following-up on the information collected in the previous stage and conducting additional research. For the sake of impartiality, it is sometimes advisable for personnel who are independent of the business unit concerned to carry out the external research. In some cases, initial external verification may be carried out by utilising public databases on the Internet. This may be all that is required. In other instances sufficient uncertainty would justify independent groundwork being carried out by appropriate internal or external resources. (See the comments under Field work, below.)

Topics for consideration Some or all of the following topics should be considered for both the potential associate and employee (the checks are very similar in both cases): • Qualifications, corporate membership of professional bodies: Verify authenticity from issuing body and in some cases verify authenticity of the issuing body itself, eg is there a qualifying requirement or does the member simply pay a joining fee for membership? Does the organisation exist as a registered place of study? • Business and employment references: Obtain independent confirmation concerning the potential associate’s or employee’s effectiveness, reputation, government or political relationships and integrity. If the candidate has provided written references, verification should be obtained directly from the referee. • Financial references: If audited financial records for the previous two years are not available, a third party financial referee may be requested to state the length of the relationship and provide an opinion of reliability, financial capabilities and probity. In certain circumstances it would be advisable for a potential employee to request a bank reference be sent directly to the potential employer. • Official registry of organisations: Check ownership of companies etc., directorships, accounts and other relevant official documentation. • Electoral records, local government business records, etc: Verify the associate or individual is recorded at the address given. • Criminal records: Check records for associate company and key management personnel or individual (if legally permissible in the country concerned). • Court judgments: Check associate company and key management personnel or individual. • Credit rating: It is recommended that one of the reputable commercial sources be utilised (depending on the country involved) to check the credit rating for the associate or individual. • Debarred or restricted parties lists: Check to see that the prospective associate or individual does not appear on any local, national or international listing of restricted parties (pursuant to trade regulations imposed by the US, UK or other nations) or of organisations debarred from bidding (eg World Bank). • Media search: Simple and cost-effective, the use of free and/or subscription databases to research the associate or individual is recommended. If the associate or individual has a website, this should be examined, as should useful government sites such as anti-cartel or anti-fraud, etc.

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• Local legal advice: If in-house advice is not available, a reputable local legal firm should be engaged to provide advice regarding the laws governing the relationship between the principal and the associate in the particular country concerned. Advice on local employment law may also be best obtained in this manner. Local attorneys can often assist in verification of local corporate registrations, or criminal or civil court records. Since this may result in considerable expense to the company, careful instructions and limitations of the scope of the work should be agreed in advance. • Field work: Some information regarding associates or employees may only be discovered via discreet and sensitive research carried out by qualified professionals. Considerable caution needs to be exercised when using others to conduct this research since it must be carried out ethically and legally. This may also result in considerable expense to the company. Careful instructions and limitations of the scope of the work should be agreed in advance.

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VIII

In-house research

Member organisations may wish to carry out their research and verification process utilising internal or local resources in some or all of the areas quoted in Section VII above. Section VIII has been produced to assist those efforts and to suggest appropriate areas of research. This section may be updated as member organisations identify and provide additional resources.

Qualifications and membership of professional bodies. Most educational or professional bodies will confirm qualifications – especially if the prospective employer or contractor is able to produce a letter of authority from the individual or company concerned. It is important to view originals of certificates issued by official bodies and, where these bodies are not well known, to assess the authenticity of the issuing body.

Business and employment references Face to face interviews are always the best method of verifying written business and employment references. In many cases this is impracticable and the only alternative is a telephone conversation.

Financial references A qualified accountant should analyse accounting statements provided by an individual or a company and give an opinion as to financial stability. Personal contact with a financial referee may be needed in lieu of the presentation of accounting statements. The comments in the previous section on business and employment references apply.

Official registry of organisations Most official registries of companies and other organisations make their records available to the public in some form. Personal application at the office concerned may be the only method, although many registries now make their records available on-line (in some cases outside normal office hours). Local resources may be useful in this regard, eg: UK Companies House – refer to the following for details of their on-line system (one of a number of systems available in the UK): http://www.companieshouse.gov.uk US Securities and Exchange Commission: general information: http://www.sec.gov Company listings search (the EDGAR database): http://www.sec.gov/edgar/searchedgar/webusers.htm

Electoral records, local government business records, etc. Local government offices and business libraries will make available public records of individuals (eg from electoral roll records) and businesses (eg from local business directories, etc.). Local resources may be useful in this regard.

Criminal records In many countries this information is either not available or is only available in certain circumstances, (eg when the individual concerned may be applying for a post involving dealing with the vulnerable members of society). However, in a number of countries the information is available with the authority of the subject of enquiry. Local counsel may be useful in this regard. Criminal Records Bureau – UK government organisation providing information regarding criminal convictions to potential employers via its ‘Disclosure Service’. Priority is given to those seeking employment in posts involving dealing with children or vulnerable adults. Limited information is available in other cases: http://www.disclosure.gov.uk

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Court judgments As with the official registries of organisations, court judgments are normally available for public scrutiny, either by personal visits to the court involved, through websites or, if sufficiently serious, in local or international media reports. Local counsel may be useful in this regard. Court Service details of judgments made in the UK High Courts: http://www.courtservice.gov.uk/judgments/judg_home.htm

Credit rating There are a large number of international and local commercial organisations offering a credit rating service on individuals and organisations on a fee-paying basis. It is not for OGP to recommend one of these organisations in preference to any of the others. There are facilities available to check on bankruptcy or insolvency of individuals or companies. These will either be registers available to public scrutiny or listings made available on the Internet. UK bankruptcy and insolvency – includes UK insolvency notices and databases, creditor meetings, liquidations, receiverships and administrations: http://www.insolvency.co.uk

Debarred or restricted parties lists Information is available on some websites, and also via media searches, regarding companies and individuals barred from bidding on local, national or international contracts. The best known website with a debarred list for individuals and companies that have been judged to have committed acts of bribery or corruption in bid processes is the World Bank site: http://www.worldbank.org/html/opr/procure/debarr.html There are a number of available services for checking the restricted parties lists under U.S. (and possibly other country) laws regulating trade.

Media searches As with credit ratings, there are many large international commercial concerns that will carry out media searches on a fee-paying basis. There are also a number of free websites that act as search engines for multiple media sources. It may be difficult and certainly time consuming to use these sources to search for specific individuals or companies.

Other information sources Over time, researchers will generate their own list of favourite research sites useful in their particular area of expertise or geographical location. The following is a list of sites that have proved useful in tracing companies that have been involved in cartel activities. These activities have then been reported on the website of the national anti-cartel authority concerned (only those which have English translations have been chosen). Finland: http://www.kilpailuvirasto.fi /cgi-bin/english.cgi Germany: http://www.bundeskartellamt.de/english.html Italy: http://www.agem.it/eng/index.htm Netherlands: http://www.nmanet.nl/en/default.asp Norway: http://www.konkurransetilsynet.no/internett/index.asp Sweden: http://www.kkv.se/eng_indexns.htm UK (Office of Fair Trading): http://www.oft.gov.uk/default.htm 16

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IX

Assessment & resolution

When all information from each stage has been collated, it needs to be analysed and assessed. Any adverse indicators or inconsistencies arising from the research, known as “red flags” (a term used in the U.S. Department of Justice brochure on the FCPA), should be identified, investigated and resolved prior to reaching a final decision. (See Appendix 2 for examples of red flags). It is advisable to prepare a final report documenting the scope of the investigation, summarising the findings, discussing any remaining risks and drawing conclusions about the potential consequences for the company. If significant remaining risks are forecast, management will need to decide whether to proceed with the business relationship. This decision should be based on awareness that once a company knows of risk and accepts it, this knowledge will likely be discovered during the prosecution of any subsequent violation. In some cases the management decision process may be assisted by a comparison between the research results for the individual associates or employees on the shortlist. Where appropriate, the report should also include specific recommendations designed to assist the business unit concerned in managing its ongoing relationship with the associate or employee.

X

Documentation

All stages of the work should be documented and securely retained. Original documents provided by the associate or employee to support nationality, qualifications, etc, should be photocopied (with the permission of the holder) and the originals returned as soon as possible. Each member of OGP will have its own terms of employment and no recommendations are made on this subject.

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XI

Safeguards

There are a number of safeguards that can help reduce potential risk. The most important of these is to ensure that strong ethical provisions are included in the contract with the associate or employee. For example, the terms of the agreement with an associate should include:

Terms of agreement • The principle that no payments be made other than in strict accordance with the terms of the agreement. • The requirement of both parties to comply with all applicable laws and regulations and specifically anti-bribery laws – except to the extent that such compliance would subject a party to liabilities or penalties under the law of its home country. • Confirmation from the associate that he has been provided with a copy of the company’s ethics policy, or equivalent document, by way of a clause added to the agreement to the effect that he has read and understood the policy and will comply with it. Members should consider a requirement for annual certification by the associate that he has complied with all laws and regulations and with the company’s ethics policy. • The associate should be required to maintain adequate internal management controls and to properly record and report all transactions in its books and records. • The company should have audit rights concerning all income and expenditure managed by the associate on its behalf. • The sanction of termination without compensation in the event of the associate violating applicable anti-bribery laws or breaching the company’s ethics policy. • The associate is prohibited from the assignment of rights to, or employment of, a third party without approval from the company. • Commitment by the associate to avoid even the appearance of an unethical payment and to report any requests for such payments. • The associate being prohibited from offering or giving anything of value to another in order to secure a business advantage. • Confirmation from the associate that he has received any applicable guidelines on gifts, hospitality, entertainment and donations from the principal and that the associate will comply with these guidelines.

Outside counsel Another safeguard to be considered when an associate appears to present a degree of risk might be to obtain an opinion from expert outside counsel that, after evaluation of all the facts and circumstances, it is reasonable for the company to enter into the particular business relationship with the prospective associate, and that such an action would not present significant risk. In some jurisdictions, such as the US, such an opinion letter can often provide an effective defence to a later charge of wrongdoing and can serve to negate a finding of corrupt intent. A number of other safeguards are available and may be designed to fit the particular situation with the help of counsel familiar with the antibribery laws and their interpretation and enforcement by the local authorities. It may be advisable to consult with expert counsel regarding any situation in which company personnel believe that there may be significant risk in proceeding with a proposed business relationship.

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XII Managing relationship integrity Entering into a relationship with an associate or employee should be followed by continuing commitments on both sides to ensure that a high level of integrity endures. Employees or intermediaries, in particular those who will be dealing with associates or government officials, should receive training in applicable national and international legislation, especially those laws relating to the prevention of bribery and corruption. Equally important is the provision of training in the company’s policies, including business conduct, corporate social responsibility and ethics. Associates who will be acting in the company’s interests on an ongoing basis should be included in this training; for example, contractors who will be working for the company full time and performing quasi-employee functions or joint venture participants. In addition, associates should be provided with copies of the company’s business ethics or business conduct policies with which they will be required to comply under the terms of their contract. The complexities of attempting to apply multiple business ethics policies in a joint venture may in some cases justify using best efforts to require the joint venture to produce its own specific ethics policy. Beyond training and education, companies should monitor and regularly review activities and progress to ensure they are being conducted in an acceptable manner. Early implementation of appropriate internal controls agreed between the company and the associate or local affiliate is essential. These should be closely monitored in the early stages of the agreement or start of business. In particular, associates should be required to provide prompt notification of any change in ownership or circumstances that might give rise to a conflict of interest, ethical deviation, or breach of law. Good communication between the parties, a clear understanding of acceptable practice and an open relationship will help to ensure that a high level of trust and integrity is built and maintained.

XIII

Training

A reputational due diligence training programme should include: • Company policy on business conduct, corporate social responsibility and business ethics (including guidance on gifts, hospitality, entertaining and donations). • Local laws and laws pertaining to the country of registration of the principal company particularly those regarding bribery and corruption • Reputational due diligence (emphasising “red flags”). Members without an existing training programme, or those after additional educational tools, are encouraged to download the OGP training template: combatting corruption (report 352) from the publications section of the OGP website http://www.ogp.org.uk. This material has been published to serve as the basis for effective anti-corruption training.

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XIV Guidance Every company should provide a contact name and telephone number or contact details for an advice-line to facilitate reporting of ethical concerns by associates or employees. It is also recommended that every company should make any “Whistle-Blower” policy available to every employee and associate.

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Appendix 1: Sample documents Document 1.1:

Potential associate: letter of authority

TO WHOM IT MAY CONCERN

[Name and address of applicant]

Application has been made to [Company] for work in connection with [Project]. Required information and documentation, as set out in the ‘Associate Request for Information’ document, has been fully completed and compiled.

It is understood that [Company] will require verification of the details provided and specifically with regard to our business reputation, qualifications, background and past performance and I hereby authorise the Company to make whatever enquiries are considered necessary in carrying out this verification. I also understand that independent external research may be undertaken in making this verification.

I authorise the Company to make enquiries of the business and financial reference provided.

I produce audited financial statements for the previous two years.†

OR Due to the unavailability of audited accounts for the current year, I produce unaudited accounts certified by senior management for that year and an audited financial statement for the previous year.†

A copy of our Standard Terms of Business is attached.†

[Signed] [Position] [Date]

† Delete as applicable

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Document 1.2:

Potential employee: letter of authority

TO WHOM IT MAY CONCERN

[Name and address of applicant]

I have made application to [Company] for employment as [Position]. I have fully completed the Application Form (and provided a copy of my C.V.†).

I understand that [Company] will require verification of the details I have provided, specifically with regard to my reputation, qualifications, background and past performance. I hereby authorise the Company to make whatever enquiries are considered necessary in carrying out this verification. I also understand that independent external research may be undertaken in making this verification.

I authorise the Company to make enquiries of my previous employers (excluding my current employer*) and personal referees. I confirm I have made my previous employers and my personal referees aware that they are likely to be contacted.

[Signed]

[Date]

† Delete if not applicable

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Document 1.3:

Potential associate: information to be requested

1 Contact information and corporate structure To be supplied: • • • • •

Full name of organisation Contact Address E-Mail address of contact Name of contact The exact status of the organisation, eg limited company or similar, partnership, sole trader, etc.

• Country of registration • Registration number or reference • Phone number of contact • Registered Address (if different to contact address)

Copies of the following documents, as appropriate: • CVs of key officers and personnel • Composition of boards and high-level committees, etc. • Organisation charts Any details of ownership interests in the Company in excess of 5. Parent company details: • Full name of parent company • Registered address

• Country of registration • Registration number or reference

Ultimate holding company details: • Full name of ultimate holding company • Registered address

• Country of registration • Registration number or reference

A brief history of the applicant organisation and involvement in recent projects. 2 Ownership and interests in other organisations Details of interests of the organisation, key management personnel and their close family members with other business organisations. (See Note 1 regarding ‘ family members’ and Note 2 regarding failure to disclose all relevant details.) 3 Business, government and political affiliations Details of business, government and political affiliations of the organisation, its key management personnel and those of their close family members. (See Note 1 regarding ‘ family members’ and Note 2 regarding failure to disclose all relevant details.) 4 Business and financial references Three business references; ensure potential associate knows that business sites should be notified of the possibility of requests for verification. Details of the organisation’s bankers.

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Copies of audited financial statements for the previous two years; in the absence of audited accounts for the current year, unaudited accounts certified by senior management may be acceptable. Standard Terms of Business including invoice payment instructions. 5 Legal disclosure Details of the nature and extent of all previous, current or pending involvement of the organisation, its key management personnel and those of their close family members in: • bankruptcy or other insolvency arrangements • criminal convictions and criminal cases • civil litigation Details of the nature and extent – so far as they are known – of previous, current or pending involvement of other employees of the organisation and those of their close family members in: • bankruptcy or other insolvency arrangements • criminal convictions and criminal cases • civil litigation (See Note 1 regarding ‘ family members’ and Note 2 regarding failure to disclose all relevant details.) 6 Compensation Unless a separate bid process is to be carried out, quote the charge rates for the goods/services to be supplied. 7 Notes Note 1: Close family members include: • • • • •

wife/husband father/father-in-law brother(s)/brother(s)-in-law daughter(s)/daughter(s)-in-law co-habiting male or female partners to any of the foregoing

• • • •

mother/mother-in-law sister(s)/sister(s)-in-law son(s)/son(s)-in-law other dependants (if any)

Note 2: Failure to disclose all relevant details may jeopardise the application.

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Document 1.4: Potential employee: personal details for an employment application form 1 Personal information • • • • • • •

Name in full Nationality Place of birth Date of birth Address Usual residence Telephone

• • • • • •

Address Temporary residence (if applicable) Telephone Mobile Fax e-mail

Passport • Issuing country • Number

• Expiry date • Current visas (including country details)

Residency documents/work permits (original documents may be checked) Qualification details: Full details of all qualifications, including the period(s) attended, award dates and the issuing University/College/Institute. Personal references Names, address and telephone of two persons not related to the potential employee but known outside the workplace. 2 Ownership and interests in organisations Details of personal ownership in companies or other organisations together with those of close family members. (See Note 1 regarding ‘ family members’ and Note 2 regarding failure to disclose all relevant details.) 3 Business, government and political affiliations Personal details, together with those of close family members, of the nature and extent of all business, government and political affiliations. (See Note 1 regarding ‘ family members’ and Note 2 regarding failure to disclose all relevant details.) 4 Employment and financial references Details of current employer and at least two previous employers (no contact should be made with the current employer without reference to the potential employee). Employment records to be collected: • Company name • Company address • Company telephone number

• Dates of employment • Position(s) held • Projects worked on

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Bank references Contact details of personal bank (a contact name, the bank’s name, address & telephone). 5 Legal disclosure 5.1 Personal details of the nature and extent of all previous, current or pending involvement in: • bankruptcy or other insolvency arrangements • criminal convictions and criminal cases • civil litigation (See Note 2 regarding failure to disclose all relevant details. Continue on separate sheets, if necessary) 5.2 Regarding close family members, details of the nature and extent of all previous, current or pending involvement in: • bankruptcy or other insolvency arrangements • criminal convictions and criminal cases • civil litigation (See Note 1 regarding ‘ family members’ and Note 2 regarding failure to disclose all relevant details. Continue on separate sheets, if necessary) 6 Notes Note 1: Close family members include: • • • • •

wife/husband father/father-in-law brother(s)/brother(s)-in-law daughter(s)/daughter(s)-in-law co-habiting male or female partners to any of the foregoing

• • • •

mother/mother-in-law sister(s)/sister(s)-in-law son(s)/son(s)-in-law other dependants (if any)

Note 2: Failure to disclose all relevant details may jeopardise potential employment or, once employed, could lead to termination.

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Appendix 2: Examples of ‘red flags’ The following two sections give examples of ‘red flags’ that should be researched and taken into account when deciding whether to sign an agreement with the company or individual concerned.

From the applicant’s information: • A public official holds company shares or other interests in the company in his own right. (Note: It is not unusual for a public official to hold an interest in a company in his official capacity.) • A foreign official has recommended the applicant, particularly if that official has discretionary authority over the business at issue. • An officer, senior executive or key employee of the company has an interest in another company that might be considered to be a competitor. • An officer, senior executive or key employee of the company is related to an officer, senior executive or key employee of a company that might be considered to be a competitor. • There are uncertainties in the business or financial references. • The normal terms of business quoted by the company or individual differ to a material extent to local business terms and conditions. • Payment instructions quoted by the company or individual include split payments, payments to an apparently unrelated third party, or to a bank account in an offshore tax regime. • The company auditors have qualified the accounts produced by the applicant for reasons that are relevant to the application. • There has been a criminal conviction of a current employee of the company for bribery, corruption or a similar criminal offence, or a civil action regarding bribery or corruption has been unsuccessfully defended by the company. • There is a current or outstanding criminal case regarding bribery, corruption or a similar criminal offence, or a current or outstanding civil action regarding bribery or corruption, against a current employee of the company. • The individual applying for employment has been convicted of bribery, or a similar criminal offence, or has appeared as a defendant in a civil case of a similar nature. • The individual applying for employment has a current or outstanding criminal case regarding bribery, corruption or a similar criminal offence, or a current or outstanding civil action regarding bribery or corruption. • The company or individual discloses previous involvement in insolvency proceedings. • There is a significant difference between the remuneration rate quoted by the company or individual and local market rates for similar goods or services. • The applicant advises that he is unable to sign that he will abide by all local and international laws regarding bribery and corruption and that he cannot abide by the principal’s business ethics policy. • The applicant requires that his identity, or if the applicant is a company, the identity of the directors, owners or employees, not be disclosed.

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From verification or additional research: • Qualifications claimed by the company or individual are denied by the issuing body. • The issuing body for the claimed qualifications is not a bona fide educational establishment or professional body, eg the company or individual can simply purchase the qualification without sitting examinations or proving standards of competency. • The applicant is found to have had little or no experience in the industry concerned. • There are significant variances between the written business and employment references and the interview of the referees. • Financial referees express reservations regarding the financial probity of the company or individual in question. • Due diligence reveals that the applicant is a shell company or has some other unorthodox corporate structure. • The records from the official registry of companies do not agree with the information given by the applicant regarding ownership of the company, directorships or details in any of the other required official documentation filed regarding the organisation. • The company or its immediate or ultimate holding company are registered in an offshore tax haven renowned for its lack of corporate or banking transparency. • The owners and/or directors of the company are discovered to be nominees and the applicant refuses to disclose the real owners/directors. • Electoral or local business records show a different location for the company or individual. (Note: This may simply mean that the official records are not up-to-date). • An official body advises a criminal conviction and this conviction has not been disclosed by the individual. (Note: This information is not legally available in all jurisdictions). • Official checks reveal a criminal conviction for bribery, corruption or a similar offence, or a civil action where the company or individual has unsuccessfully defended their actions and the applicant has not disclosed this case. • Official checks reveal a current or outstanding criminal case involving bribery, corruption or a similar offence, or a current or outstanding civil action, which has not been disclosed by the applicant. • A reputable credit agency has provided a poor credit rating on the company or individual or has advised previous liquidity problems not disclosed by the applicant. * The individual or company appears on a list of those debarred from bidding on local, national or international contracts. • Media searches reveal potentially damaging information regarding the applicant. • Research work uncovers close associations with local or national politicians, potential competitors, criminal or political activists, etc. The following red flags are unlikely to reveal themselves until the contract has been signed and some goods or services have been supplied to the principal. They should not be dismissed as ‘too late’, but should be considered in terms of the need to potentially cease using or trading with or through the company or individual.

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Payments: • • • • • • • • •

Payment instructions on incoming invoices are frequently amended. Payment on incoming invoices is requested in cash. Payment is requested to a third party, offshore or numbered bank account. Payments in advance are frequently requested. Amendments are requested to issued invoices over the telephone and with little explanation. Complex payment instructions are given, possibly including split payments. A significant increase in remuneration is requested within the first year of operation of the contract. Urgent requests are made for the payment of large unspecified expenses. Payment on inflated invoices is requested with credit notes “to follow”.

Other operational red flags: • A number of complaints regarding non-payment or ethical standards are received from sub-contractors. • Reliable sources or media reports suggest inappropriate payments made on behalf of the principal. • The associate is unable to handle the principal’s business with the quality and quantity of resources at his command. • The associate proves to be ignorant of local laws and customs regarding the principal’s business.

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Appendix 3: Due diligence & offshore companies Offshore companies Offshore Companies are usually defined as those companies that are registered in countries other than their main place of business. Normally the country of registration will have made special provisions regarding taxation of the profits of those companies and simplified the government requirements regarding registration and official records. Many of the recognised tax havens do not require listings of shareholders or directors to be officially filed or, if there is a requirement to file, no public access to the listings is given. In most cases, strict local bank secrecy laws reinforce the lack of transparency inherent in the government registration systems in these countries. The most common offshore regimes or ‘tax havens’ are: Anguilla Belize Cayman Islands Gibraltar† Isle of Man† Liberia Monaco Seychelles St. Lucia Switzerland Western Samoa

Bahamas British Virgin Islands Cyprus† Guernsey† Jersey† Liechtenstein Panama† St. Kitts & Nevis St. Vincent (and Grenadines) Turks & Caicos Islands

This list is not exhaustive; smaller regimes have been excluded. † NB: Although shareholder and director details are officially filed in these countries or states, the shareholder details are frequently protected by the use of nominees and the director details by use of third party directors. There may, additionally, be a government requirement for at least one local director.

Transparency Transparency is essential between the parties in the reputational due diligence process: transparency between a principal and a potential associate or employee when negotiating a new contract, and transparency in maintaining the relationship after a contract has been signed. Where a potential associate is a company registered “offshore”, transparency is often impaired. Even if the company declares it has made a full disclosure of all material information regarding the ownership, the officers of the company and other details, it is difficult for this to be verified through official channels and the use of unofficial channels sometimes can result in a breach of local laws. Local bank secrecy laws in the tax havens frequently compound the lack of transparency.

The problem Companies incorporated in one of these tax havens have long been viewed with suspicion regarding money laundering, bribery and a variety of other illicit financial activities. While these illicit activities are carried out in offshore locations, without a doubt there are also companies incorporated in these locations for legitimate reasons. Because of the reputation these offshore countries have gained over time, any company seeking to do business with an associate incorporated or headquartered in one of the countries should use extreme caution. 30

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Guidelines on reputational due diligence

While the simple remedy would be to exclude all offshore companies from the short list of recommended associates, this could result in the exclusion of legitimate, well-qualified companies from the list. It may be preferable to consider the risk after carefully evaluating all of the information gathered about a prospective associate. If incorporation in a tax haven is the only “red flag”, then a decision to proceed may be considered. In this case, a company might also consider the use of some safeguards such as obtaining an outside counsel’s opinion or requiring additional contractual certification from the associate. Development in the oil and gas industry is currently taking place in what might be called ‘frontier’ areas. In many of these areas the financial and commercial infrastructure is underdeveloped. This problem is likely to be compounded by political and financial instability. For these reasons, the financial and commercial services required by the large organisations involved in such developments are sometimes supplied from outside the national boundaries of the developing areas. Banking is one of the main services involved and it is quite usual to find that local banks are merely used as sources of petty cash for disbursements, with all major transactions taking place at banks outside the country concerned. These services could therefore be described as ‘offshore’. The banking services used by the companies supporting the major developers are often teamed with offshore company registration. The principal seeking an associate registered onshore is likely to find the choice severely restricted. In these circumstances it would be pointless in ‘marking down’ the offshore companies on the short list. However, careful scrutiny of these banking arrangements is advised before making any payment into an offshore account.

Proposed remedy In line with the OGP position on transparency in areas such as the financial transparency of resource revenue streams, OGP recommends that a good faith attempt should be made to require prospective associates incorporated in these offshore locations – and not well known or established by good reputation – to disclose their corporate and ownership information and to provide their rationale for the formation of the company under the offshore regime. This could be achieved by requiring full disclosure of shareholders, directors and financial statements by potential associates as part of the reputational due diligence process. A possible effect of this approach on companies which are not prepared to disclose such details and which lose contracts is the concern that non-disclosure has harmed their bid, whether this is true or not.

© 2004 OGP

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International Association of Oil & Gas Producers

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© 2004 OGP

What is OGP? The International Association of Oil & Gas Producers encompasses the world’s leading private and state-owned oil & gas companies, their national and regional associations, and major upstream contractors and suppliers.

Vision • To work on behalf of all the world’s upstream companies to promote responsible and profitable operations.

Mission • To represent the interests of the upstream industry to international regulatory and legislative bodies. • To achieve continuous improvement in safety, health and environmental performance and in the engineering and operation of upstream ventures. • To promote awareness of Corporate Social Responsibility issues within the industry and among stakeholders.

Objectives • To improve understanding of the upstream oil and gas industry, its achievements and challenges and its views on pertinent issues. • To encourage international regulators and other parties to take account of the industry’s views in developing proposals that are effective and workable. • To become a more visible, accessible and effective source of information about the global industry – both externally and within member organisations. • To develop and disseminate best practices in safety, health and environmental performance and the engineering and operation of upstream ventures. • To improve the collection, analysis and dissemination of safety, health and environmental performance data. • To provide a forum for sharing experience and debating emerging issues. • To enhance the industry’s ability to influence by increasing the size and diversity of the membership. • To liaise with other industry associations to ensure consistent and effective approaches to common issues.

209-215 Blackfriars Road London SE1 8NL United Kingdom Telephone: +44 (0)20 7633 0272 Fax: +44 (0)20 7633 2350 165 Bd du Souverain 4th Floor B-1160 Brussels, Belgium Telephone: +32 (0)2 566 9150 Fax: +32 (0)2 566 9159 Internet site: www.ogp.org.uk e-mail: [email protected]

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