guidelines on reputational due diligence

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Guidelines on

reputational due diligence

Report No. 356

September 2004



P

ublications

Global experience

Te International Association of Oil & Gas Producers has access to a wealth of technicalknowledge and experience with its members operating around the world in many dif-ferent 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 bestpractice throughout the world.

Te oil and gas exploration and production industry recognises the need to develop con-sistent databases and records in certain fields. Te OGP’s members are encouraged to usethe 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 andsafety and environmental bodies. Requests come from governments and non-govern-ment organisations around the world as well as from non-member companies.

Disclaimer

Whilst every effort has been made to ensure the accuracy of the information contained in this publi-cation, neither the GP 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. Te recipient is obliged toinform any subsequent recipient of such terms.

Copyright OGP

All rights are reserved. Material may not be copied, reproduced, republished, downloaded, stored inany 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 permissionof the GP.

Tese erms 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 duediligence

Report No: 356

September 2004



Acknowledgements

Tis guideline was produced for Members of the International Association of Oil & Gas Producers by the Anti-corruption

Subcommittee.

Subcommittee members:

Genevieve Laffl y Murphy API

Jack Lynch BP

Kit Armstrong Chevronexaco

Stuart Brooks Chevronexaco

Raphael Vermeir ConocoPhillips

Valentina Ferri ENI

Laurence Fry ENI Chairman

Judith ocher ENSCO

Nick Boydell ExxonMobil

Paul Fenby ExxonMobil

Anne McAdams ExxonMobil

Sophie Depraz IPIECA

Erik Andreasen Mærsk

Anna Hensel MarathonSverre 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



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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

1.2 Potential employee: letter of authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

1.3 Potential associate: information to be requested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

1.4 Potential employee: personal details for an employment application form . . . . . . . . . . . . . . . 25

Appendix 2 Red flags . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Appendix 3 Due diligence & offshore companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

able of contents



International Association of Oil & Gas Producers

© 2004 OGP

Definitions

Te following words are defined in the context of these guidelines:

Associate Partner, co-venturer or supplier.

Intermediary Agent, representative, consultant, distributor.Partner Co-owner of a business enterprise, with defined rights and obligations.

Supplier Provider of goods or services, including contractors.

Employee Individual hired directly by a principal on a contract of employment.

Foreign ffi cial

OR:

ffi cial

Te Foreign Corrupt Practices Act defines the term “foreign offi cial”as:

“Any offi cer or employee of a foreign government or any department,agency, or instrumentality thereof, or of a public international organiza-tion, or any person acting in an offi cial 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, offi cer, or employee (elected, appointed or career) of () agovernment or any department or agency of a government at the fed-eral, regional or local level; () a political party or candidate for politi-cal offi ce; () any company in which a government holds a substantialownership interest; or () a public international organisation such as the

World Bank, the United Nations or the International Monetary Fund.

Due diligence Te 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.

Public corruption

An act done with the intention of giving some advantage inconsistent with a public offi cal’s duties. Such acts include the misuse of a publicoffi cial’s position in order to procure some benefit for oneself or foranother as well as acts intended to induce a public offi cial to misuse hisor her position or character.

Private corruption

An act done with the intention of giving some advantage inconsistent with the rights of others. Such acts include the misuse of a position aris-ing from a fidiuciary relationship in order to procure some benefit foroneself or for another who is not an intended beneficiary of the fiduciary

relationship as well as acts intended to induce another to misuse his orher positon arising from a fiduciary relationship.

Fiduciary relationship

One founded on the trust or confidence placed by one person in theintegrity and fidelity of another which gives rise to a duty to act pri-marily for the other’s benefit in matters arising out of and from thatrelationship. For purposes of these guidelines, both employees and inter-mediaries will be considered as having such a relationship with theiremployer/principal.

He In reference to associate, “he” also refers to she, they or it.



Guidelines on reputational due diligence

© 2004 OGP

I Introduction

Te point at which companies interact with others in the pursuit of business represents bothopportunity and risk:

• Opportunity — because the other party may provide additional resources, valuableknowledge, assistance or access to business and markets, which might not otherwise beavailable;

• Risk — because companies, relying on associates or employees unfamiliar to them and who have not carried out appropriate due diligence research, may unwittingly suffer theconsequences of undesirable practice or “harm by association”.

Te risk increases when the operation takes place in new, hazardous or uncertain environ-ments, or when the business relationship is not underpinned by effective controls, mutualunderstanding or clear agreements.

Companies are more vulnerable when knowledge of their associates and employees is poor.Tose who have carried out the appropriate due diligence process on associates, employeesand business environments will be better positioned to identify areas of risk and reduce thelikelihood of corrupt practice and reputational damage. Additionally, in certain circum-stances, 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 takereasonable 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 (non-related business associates), the parties may be able to limit their liabilities to one anotherthrough mutual undertakings. In hybrid situations (joint ventures), a variety of controls and

limitations on liability may be appropriate. Corruption within the context of these guidelinesincludes both the public and private sector. While the bribery of government and state offi -cials remains a serious concern, it must be recognised that corrupt practice can and does alsooccur entirely within the private sector.

Tese guidelines are designed as a resource for companies intending to establish and/ormaintain effective anti-corruption practices. Tese include evaluation of the potential risksof doing business with associates and implementation of measures to reduce those risks. Itsets out to provide guidelines on designing and conducting due diligence procedures andestablishing a framework for in-house programmes. Members can adapt the guidelines to fitthe 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. Adviceshould always be sought from qualified legal counsel.




© 2004 OGP

II Pressure from all sides

Legislation

Te 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.Tey have direct consequences for companies publicly listed in the United States or registeredin 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.Te documents are broadly similar and both prohibit the bribery of foreign offi cials, eitherdirectly or through third parties, for the purpose of obtaining or keeping business.

The Foreign Corrupt Practices Act

In the 97s, US Securities Exchange Commission (SEC) investigations led to a large numberof US companies admitting the payment of over US$ million to overseas governmentoffi cials, politicians and political parties. Tese payments were either illegal or highly ques-tionable and were made to secure some greater or lesser form of commercial advantage. Tepayments varied in scale from large bribes paid to a highly placed government offi cial to pay-ments of a type known as “facilitating payments” made to ensure that a minor functionary carried out his normal duties in a more timely fashion. Te FCPA was passed by Congress in977 in an attempt to prevent this bribery of foreign offi cials.

Te anti-bribery provisions of the FCPA make it il legal to bribe foreign offi cials to obtainor retain business or to direct business to a specific person. Tese provisions apply to certainissuers of registered securities and issuers required to file periodic reports with the SEC.Tey also apply to US “domestic concerns” (basically an organisation which has its principalplace of business in the US). Te 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 “know-ing” that a ll or part of the payment will be used as a bribe to a foreign offi cial. “Knowing” isdefined to include “being aware of a high probability of the existence of such circumstances”.Te 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 excludedfrom the provisions. Examples of these routine governmental actions have been given by theUS Department of Justice and are: “obtaining permits, licences, or other offi cial 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$ million,

• For offi cers, directors, stockholders, employees or agents – a fine of up to US$,and imprisonment for up to years.

Under the Alternative Fines Act these fines may be much higher, however. Te actual finemay 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.

Te US Department of Justice and Department of Commerce have jointly produced a bro-chure that provides a general description of the FCPA anti-bribery provisions. Te brochureincludes specific comments on third party payments. It states: “to avoid being held liable forcorrupt third party payments, US companies are encouraged to exercise due diligence and




© 2004 OGP

In December , the United Nations General Assembly adopted the UN Convention Against Corruption and issued the following description of this new global instrument:

“Te Convention introduces a comprehensive set of standards, measures and rulesthat all countries can apply, in order to strengthen their legal and regulatory regimesto fight corruption. It calls for preventive measures and the criminalization of themost prevalent forms of corruption in both public and private sectors. And it makesa major breakthrough by requiring Member States to return assets obtained throughcorruption to the country from which they were stolen. Tese provisions – the firstof their kind – introduce a new fundamental principle, as well as a framework forstronger cooperation between States to prevent, detect, and return the proceeds of corruption. Corrupt offi cials will in future find fewer ways to hide their illicit ga ins.Tis is a particularly important issue for many developing countries where corrupthigh offi cials have plundered the national wealth, and where new governments badly need resources to reconstruct and rehabilitate their societies.”

Sarbanes-Oxley Act of 2002

Te recent history of serious accounting malpractice by several large companies in the UnitedStates has led to the passing by the US Congress of the Sarbanes-Oxley Act. Tis requires,among other things, CEOs and CFOs to take responsibility on behalf of their company forthe validity of financial reports, the effectiveness of internal controls and for full disclosureof any deficiencies in internal controls or known fraudulent activity to the company audi-tors 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 authori-ties (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, sharehold-ers and employees to maintain ever-higher standards of probity and for executives to takepersonal responsibility for serious governance failings. oday, few corporate policy portfoliosare complete without a document on business principles. Te challenge for companies isto effectively practice what they preach. Addressing reputational risk is one important steptowards achieving that objective.

Transparency International

ransparency International (I) principles provide a framework for companies of all sizesto commit to a policy of no bribery and to the establishment of a programme to counterbribery. In addressing business relationships, I 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 asanything extraordinary. Rather, it reflects sound governance and forms an integral part of the risk-management process undertaken by a prudent and responsible operator. Due dili-gence 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 duediligence research might be successfully used in a court of law.




© 2004 OGP

III Roles & risks

Roles

Associates, intermediaries, partners, and employees all play important roles in helping com-

panies to achieve success in environments where social, economic, cultural and politicalfactors 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 beingplayed:

Te most effective will help to navigate the company through this maze. Tey can identify opportunities and trends, open up local markets to company products and services, andprovide access to decision-makers, while promoting the company’s image and safeguardingits integrity.

Generally speaking, joint venture associates and suppliers are independent businesses respon-sible 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 anotherentity, 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 com-pany 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 expectedto act primarily for the benefit of their employer/principal.

As a rule, the employer/principal places greater trust in its employees and intermediaries thanit does in its business associates. Terefore, the reputational and legal risks arising out of theactivities of employees and intermediaries are usually greater than those arising out of theactivities of business associates.

Employing local businesses and staff is highly desirable from the perspectives of manage-ment, business development, cost and knowledge. It also addresses corporate social responsi-bility 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 presentedby 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 judgedto 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.Te level of due diligence necessary will vary with the particular circumstances and willrequire some judgement.

Te major risk areas in partnerships and joint ventures, especially those involving foreignpartners, are disagreements over hidden differences, misunderstandings, concealed informa-tion, ulterior motives, or failure to comply with applicable laws. Any of these may ultimately lead to a diffi cult and expensive termination of the agreement and potential liability for thecompany. Partnerships and joint ventures with offshore companies require particular caution(see Appendix )

National laws sometimes require that a foreign principal operate in partnership with a localorganisation or individual. It also makes practical sense to use a partner familiar with thelanguage, culture and business environment. Many local entities that might be appropri-




© 2004 OGP

ate for this purpose will be unknown to the company and will require some due diligenceefforts.

Risks may arise for a variety of reasons. Vested interests may lead to unethical practice orbreaches of the law. In some business environments corruption is endemic, and unethicalactivity is more likely to occur as a matter of course. Inappropriate activity by one part-ner may, under certain circumstances, expose the other to risk, if only through association.Furthermore, mutual ignorance of corporate policies and national legislation could result ina 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 notrequire actual knowledge of the prohibited conduct (eg where ‘deliberate ignorance’ or ‘wilfulblindness’ of culpable conduct or suspicious circumstances may be interpreted as knowledge

of the events). While not an affi rmative defence, demonstrating that all third party relation-ships have been subject to thorough due diligence can substantially mitigate the presumptionof knowledge.

Common levels of risk

Te amount of due diligence undertaken should be appropriate to the probable risk of cor-ruption. Associates or intermediaries that are well-established multi-nationals with sharestraded on a regulated stock exchange or with headquarters in a country with strong, well-enforced anticorruption laws should have established internal controls and risk managementstrategies. Similarly, associates well known to the company for their ethical and law-abidingpractices 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 inover 7% of reported cases. Te reasons for their involvement are not always straightforward.Opportunity, ignorance, pressure, resentment, poor controls and bad management are justsome 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 corruptpractices. Terefore, when employing staff at any level, it is sensible to carry out at least basicchecks to verify qualifications, employment history and character. Te selection and appoint-ment or promotion of staff to key positions requires particular care and may demand greaterdepth and scope in the pre-employment verification process. Te due diligence process or

the information gathered by that process may also prove effective in some employment law disputes




© 2004 OGP

IV Purpose, process & product

Purpose

Te due diligence process is designed to assist decision-making by assessing the potential risk

of conducting business with a particular associate or employee. Te purpose of conductingdue diligence prior to entering into a business relationship is to develop a reasonable objectivebasis upon which company management can proceed in good faith that the associate will notmake improper payments to government offi cials or commit other illegal or unethical actsin the performance of company business. It is particularly applicable when contemplatingbusiness relationships with previously unknown parties, or when considering mergers, acqui-sitions or business in new markets where dependence upon others is likely to be greater. Tedue diligence process should be completed before commencement of the business, whetherthat is in a newly merged company, a purchased company or opening up a new market.

Process

Te 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. Tis should be custom-built for each individual situa-tion. (Section VI)

• Base information collection and verification. Tis should include the decision as to theparties 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 longer-term commitment to the required ethical policies and standards by the associate oremployee. (Section XII)

Product

Te process seeks to acquire all available, relevant information on the potential associateor employee and to ensure a basis of integrity for any subsequent relationship. Te researchand verification process should enable the following to be described in the recommendationreport to management:

• Positive and negative aspects of the proposed solution.• An assessment of the risks.




© 2004 OGP

V Selection of associate or employee

Whether the decision is to use an associate or an employee, every company should have aprocess in place to identify the best-qualified service provider or individual for a particularbusiness transaction. An evaluation of the relevant market is essential to make a recommen-

dation to management. Te reasons for making the selection should be documented.

Te process should include an initial screening of the prospective associate’s reputation forquality work and compliance with law. Tis helps assess the risk to which the company couldbecome exposed for that prospective associate’s actions. For example, such selection processnormally would include consideration of the potential associate’s qualifications for the job orarrangement, his past performance of similar tasks and his reputation for ethical conduct.Te nature and extent of the screening are matters of judgement. Relatively little screen-ing 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, littlescreening 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 goodtrack record for performance and ethical conduct. On the other hand, more extensive screen-ing will be appropriate for a prospective business associate not well known to the company.




© 2004 OGP

VI Base information collection

Once the initial screening has taken place and the business justification for the short-list hasbeen approved, the next stage is to decide the extent of due diligence research required foreach prospective associate. Tis will require the judgment of persons familiar with the due

diligence process and the applicable laws. As discussed above in section , some prospectiveassociates will require more scrutiny than others. For example, in the case of prospectiveassociates judged to present potential risk, it would be wise to thoroughly research their repu-tations, qualifications, background and past performance. Te process should be explainedfully to the parties in question in order to obtain their understanding and co-operation. Teexplanation should include the fact that independent external research will be carried outand 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 authori-sation are included in Appendix as Document . in respect of potential associates andDocument . in respect of potential employees.

Te process of collecting information begins with requesting the prospective associate oremployee to provide basic information. Tis can be done by asking them to complete a ques-tionnaire or by a personal interview. Suffi cient information should be obtained to allow foran informed decision. Te information sought from candidates may cover some or all of thefollowing:

Potential associate

• Ownership information, corporate structure, place of incorporation and names of offi c-ers and directors: Apart from the obvious contact names, locations, phone numbers,this should include CVs of offi cers and key personnel, organisation charts, compositionof boards and higher level committees, etc . If the organisation is a company, the placeof incorporation and status of the company should be given (eg , publicly traded, limitedliability, 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: Tis should indicate interests of thecompany, key management personnel and their immediate families, in other businessorganisations that might result in conflicts of interest.

• Business, government and political affi liations: Te potential associate should providedetails of business, government and political affi liations of the company, key managementpersonnel and their immediate families, including any relationship with a GovernmentOffi cial. Due consideration needs to be given to local laws protecting privacy. Sometimes

in countries with unstable political regimes, a confidentiality agreement may prove effec-tive in affording comfort to a prospective associate providing details of political affi lia-tions.

• Business and financial references: Te company or individual associate should be askedto provide business and financial references. Business references should be capable of ver-ification and the candidate should be requested to notify referees of this fact. Obtainingaudited financial statements for the previous two years is advisable. In the absence of audited accounts for the current year, unaudited accounts certified by senior manage-ment may be accepted. Te standard terms of business, if any, of the associate should berequested together with instructions that will be required for invoice payment.

• Legal disclosures: Information should be sought regarding any involvement by the com-

pany or key management personnel in previous insolvency proceedings, criminal convic-tions 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 besupplied and compared with the quoted rates from the prospective associate.




© 2004 OGP

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

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 wellas offi ce address, date and place of birth, nationality, family details. Supporting docu-mentation for qualifications should be requested (originals, if possible), together withpassport, visas, residency documents, work permits, etc ., if the individual is not a nativeof the business location (originals). It is advisable to take photocopies of all this docu-mentation, which may prove useful if legal disputes arise either in respect of employmentdiffi culties with the individual or with local employment authorities.

• Ownership and interests in organisations: Information concerning the ownership orinterests in companies or other organisations by the individual or close family membersis essential to assess the potential for conflicts of interest.

• Business, government and political affi liations: Te nature and extent of all business,government and political affi liations of the individual and close members of his family should be fully disclosed. Te consequences of failure to disclose such details should beexplained carefully to the potential employee at this stage. Due consideration needs tobe given in countries with unstable political regimes where details of political affi liationsmay be refused for security reasons.

• Employment and financial references: References should be sought from at least the twolatest 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 indi-

vidual in bankruptcy or other insolvency arrangements, criminal convictions or civillitigation (current, pending or potential, in all cases). Convictions for driving offencesshould only be recorded if serious or if the services to be provided relate to driving.

• Compensation: Te salary package will normally have been fixed beforehand by thecompany and may be related to other similar posts. Enquiries should be made of thepotential employee regarding last salary and benefits earned. Tis will prevent embar-rassment at a later stage if there is a significant discrepancy between the package offeredand 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 qualifiedlegal counsel before proceeding with such due diligence.

Personal details to be requested on an employment application form included in Appendix, document .




© 2004 OGP

VII Pre-contract verification

Te external stage of research involves verifying and following-up on the information col-lected 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 carriedout by utilising public databases on the Internet. Tis may be all that is required. In otherinstances suffi cient 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 andemployee (the checks are very similar in both cases):

• Qualifications, corporate membership of professional bodies: Verify authenticity fromissuing 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 thepotential associate’s or employee’s effectiveness, reputation, government or political rela-tionships and integrity. If the candidate has provided written references, verificationshould be obtained directly from the referee.

• Financial references: If audited financial records for the previous two years are not avail-able, a third party financial referee may be requested to state the length of the relation-ship and provide an opinion of reliability, financial capabilities and probity. In certaincircumstances it would be advisable for a potential employee to request a bank referencebe sent directly to the potential employer.

• Offi cial registry of organisations: Check ownership of companies etc ., directorships,accounts and other relevant offi cial documentation.

• Electoral records, local government business records, etc: Verify the associate or indi-vidual is recorded at the address given.

• Criminal records: Check records for associate company and key management personnelor individual (if legally permissible in the country concerned).

• Court judgments: Check associate company and key management personnel or indi-vidual.

• Credit rating: It is recommended that one of the reputable commercial sources be uti-lised (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 indi-

vidual 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 organisa-tions debarred from bidding (eg World Bank).

• Media search: Simple and cost-effective, the use of free and/or subscription databases toresearch 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-cartelor anti-fraud, etc .




© 2004 OGP

• Local legal advice: If in-house advice is not available, a reputable local legal firm shouldbe engaged to provide advice regarding the laws governing the relationship between theprincipal and the associate in the particular country concerned. Advice on local employ-

ment law may also be best obtained in this manner. Local attorneys can often assist inverification of local corporate registrations, or criminal or civil court records. Since thismay result in considerable expense to the company, careful instructions and limitationsof the scope of the work should be agreed in advance.

• Field work: Some information regarding associates or employees may only be discoveredvia discreet and sensitive research carried out by qualified professionals. Considerablecaution needs to be exercised when using others to conduct this research since it mustbe carried out ethically and legally. Tis may also result in considerable expense to thecompany. Careful instructions and limitations of the scope of the work should be agreedin advance.




© 2004 OGP

VIII In-house research

Member organisations may wish to carry out their research and verification process utilisinginternal or local resources in some or all of the areas quoted in Section VII above. Section VIIIhas been produced to assist those efforts and to suggest appropriate areas of research. Tis

section may be updated as member organisations identify and provide additional resources.

Qualifi cations and membership of professional bodies.

Most educational or professional bodies will confirm qualifications – especially if the pro-spective employer or contractor is able to produce a letter of authority from the individual orcompany concerned. It is important to view originals of certificates issued by offi cial bodiesand, 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 employ-

ment references. In many cases this is impracticable and the only alternative is a telephoneconversation.

Financial references

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

Offi cial registry of organisations

Most offi cial registries of companies and other organisations make their records availableto the public in some form. Personal application at the offi ce concerned may be the only method, although many registries now make their records available on-line (in some casesoutside normal offi ce 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 anumber 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 offi ces and business libraries will make available public records of indi-viduals (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 cir-cumstances, (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 informationis available with the authority of the subject of enquiry. Local counsel may be useful in thisregard.

Criminal Records Bureau – UK government organisation providing information regardingcriminal convictions to potential employers via its ‘Disclosure Service’. Priority is given tothose seeking employment in posts involving dealing with children or vulnerable adults.Limited information is available in other cases: http://www.disclosure.gov.uk




© 2004 OGP

Court judgments

As with the offi cial registries of organisations, court judgments are normally available for

public scrutiny, either by personal visits to the court involved, through websites or, if suf-ficiently serious, in local or international media reports. Local counsel may be useful in thisregard.

Court Service details of judgments made in the UK High Courts:http://www.courtservice.gov.uk/judgments/judg_home.htm

Credit rating

Tere are a large number of international and local commercial organisations offering a creditrating service on individuals and organisations on a fee-paying basis. It is not for OGP torecommend one of these organisations in preference to any of the others.

Tere are facilities available to check on bankruptcy or insolvency of individuals or compa-nies. Tese will either be registers available to public scrutiny or listings made available onthe Internet.

UK bankruptcy and insolvency – includes UK insolvency notices and databases, creditormeetings, 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 companiesand individuals barred from bidding on local, national or international contracts. Te bestknown website with a debarred list for individuals and companies that have been judgedto have committed acts of bribery or corruption in bid processes is the World Bank site:http://www.worldbank.org/html/opr/procure/debarr.html

Tere 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. Tere are also a number of free websites that act assearch engines for multiple media sources. It may be diffi cult and certainly time consumingto 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 theirparticular area of expertise or geographical location. Te following is a list of sites that haveproved useful in tracing companies that have been involved in cartel activities. Tese activi-ties 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 (Offi ce of Fair rading): http://www.oft.gov.uk/default.htm




© 2004 OGP

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” (aterm 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 for examples of red flags).

It is advisable to prepare a final report documenting the scope of the investigation, summaris-ing the findings, discussing any remaining risks and drawing conclusions about the potentialconsequences for the company. If significant remaining risks are forecast, management willneed to decide whether to proceed with the business relationship. Tis decision should bebased on awareness that once a company knows of risk and accepts it, this knowledge willlikely be discovered during the prosecution of any subsequent violation. In some cases themanagement decision process may be assisted by a comparison between the research resultsfor the individual associates or employees on the shortlist. Where appropriate, the reportshould also include specific recommendations designed to assist the business unit concernedin managing its ongoing relationship with the associate or employee.

X Documentation

All stages of the work should be documented and securely retained. Original documentsprovided by the associate or employee to support nationality, qualifications, etc , should bephotocopied (with the permission of the holder) and the originals returned as soon as possi-ble. Each member of OGP wil l have its own terms of employment and no recommendationsare made on this subject.




© 2004 OGP

XI Safeguards

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

Terms of agreement

• Te principle that no payments be made other than in strict accordance with the termsof the agreement.

• Te requirement of both parties to comply with all applicable laws and regulations andspecifically anti-bribery laws – except to the extent that such compliance would subjecta 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’sethics policy, or equivalent document, by way of a clause added to the agreement to theeffect 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 com-plied with all laws and regulations and with the company’s ethics policy.

• Te associate should be required to maintain adequate internal management controlsand to properly record and report all transactions in its books and records.

• Te company should have audit rights concerning all income and expenditure managedby the associate on its behalf.

• Te sanction of termination without compensation in the event of the associate violatingapplicable anti-bribery laws or breaching the company’s ethics policy.

• Te associate is prohibited from the assignment of rights to, or employment of, a thirdparty without approval from the company.

• Commitment by the associate to avoid even the appearance of an unethical payment andto report any requests for such payments.

• Te associate being prohibited from offering or giving anything of value to another inorder 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 willcomply 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 businessrelationship with the prospective associate, and that such an action would not present signifi-cant risk. In some jurisdictions, such as the US, such an opinion letter can often provide aneffective defence to a later charge of wrongdoing and can serve to negate a finding of corruptintent.

A number of other safeguards are available and may be designed to fit the particular situ-ation with the help of counsel familiar with the antibribery laws and their interpretationand enforcement by the local authorities. It may be advisable to consult with expert counselregarding any situation in which company personnel believe that there may be significantrisk in proceeding with a proposed business relationship.




© 2004 OGP

XII Managing relationship integrity

Entering into a relationship with an associate or employee should be followed by continuingcommitments 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 gov-ernment offi cials, should receive training in applicable national and international legislation,especially those laws relating to the prevention of bribery and corruption. Equally importantis the provision of training in the company’s policies, including business conduct, corporatesocial responsibility and ethics. Associates who will be acting in the company’s interests onan 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 ven-ture participants. In addition, associates should be provided with copies of the company’sbusiness ethics or business conduct policies with which they will be required to comply underthe terms of their contract. Te complexities of attempting to apply multiple business ethicspolicies in a joint venture may in some cases justify using best efforts to require the jointventure to produce its own specific ethics policy.

Beyond training and education, companies should monitor and regularly review activitiesand progress to ensure they are being conducted in an acceptable manner. Early implementa-tion of appropriate internal controls agreed between the company and the associate or localaffi liate is essential. Tese should be closely monitored in the early stages of the agreement orstart of business. In particular, associates should be required to provide prompt notificationof 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 andan open relationship will help to ensure that a high level of trust and integrity is built andmaintained.

XIII raining

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 educationaltools, are encouraged to download the GP training template: combatting corruption (report) from the publications section of the OGP website http://www.ogp.org.uk .

Tis material has been published to serve as the basis for effective anti-corruption training.




© 2004 OGP

XIV Guidance

Every company should provide a contact name and telephone number or contact details foran advice-line to facilitate reporting of ethical concerns by associates or employees. It is alsorecommended that every company should make any “Whistle-Blower” policy available to

every employee and associate.




© 2004 OGP

Appendix 1: Sample documents

Document 1.1: Potential associate: letter of authority

O WHOM I MAY CONCERN

[Name and address of applicant]

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

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

I authorise the Company to make enquiries of the business and financial reference pro-vided.

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

OR

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

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

[Signed]

[Position]

[Date]

† Delete as applicable




© 2004 OGP

Document 1.2: Potential employee: letter of authority

O WHOM I MAY CONCERN

[Name and address of applicant]

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

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

I authorise the Company to make enquiries of my previous employers (excluding my cur-rent 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




© 2004 OGP

Document 1.3: Potential associate: information to be requested

1 Contact information and corporate structure

o be supplied:

• Full name of organisation • Country of registration

• Contact Address • Registration number or reference

• E-Mail address of contact • Phone number of contact

• Name of contact

• Te exact status of the organisation, eg limited company or similar, partnership,sole trader, etc.

• Registered Address (if different to con-tact address)

Copies of the following documents, as appropriate:• CVs of key offi cers 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 • Country of registration

• Registered address • Registration number or reference

Ultimate holding company details:

• Full name of ultimate holding company • Country of registration

• Registered address • 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 affi liations

Details of business, government and political affi liations of the organisation, its key manage-ment personnel and those of their close family members.


4 Business and fi nancial references

Tree business references; ensure potential associate knows that business sites should be noti-fied of the possibility of requests for verification.

Details of the organisation’s bankers.




© 2004 OGP

Copies of audited financial statements for the previous two years; in the absence of auditedaccounts for the current year, unaudited accounts certified by senior management may beacceptable.

Standard erms of Business including invoice payment instructions.

5 Legal disclosure

Details of the nature and extent of all previous, current or pending involvement of the organ-isation, 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 membersin:





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 • mother/mother-in-law

• father/father-in-law • sister(s)/sister(s)-in-law

• brother(s)/brother(s)-in-law • son(s)/son(s)-in-law

• daughter(s)/daughter(s) -in-law • other dependants (if any)

• co-habiting male or female partners toany of the foregoing

Note 2:

Failure to disclose all relevant details may jeopardise the application.




© 2004 OGP

Document 1.4: Potential employee: personal details for an employment

application form

1 Personal information

• Name in full • Address

• Nationality • emporary residence (if applicable)

• Place of birth • elephone

• Date of birth • Mobile

• Address • Fax

• Usual residence • e-mail

• elephone

Passport

• Issuing country • Expiry date

• Number • 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 issuingUniversity/College/Institute.

Personal references

Names, address and telephone of two persons not related to the potential employee butknown 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.


3 Business, government and political affi liations

Personal details, together with those of close family members, of the nature and extent of allbusiness, government and political affi liations.


4 Employment and fi nancial 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 • Dates of employment

• Company address • Position(s) held

• Company telephone number • Projects worked on




© 2004 OGP

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 pendinginvolvement in:




(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:




(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 • mother/mother-in-law

• father/father-in-law • sister(s)/sister(s)-in-law

• brother(s)/brother(s)-in-law • son(s)/son(s)-in-law

• daughter(s)/daughter(s) -in-law • other dependants (if any)

• co-habiting male or female partners toany of the foregoing

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




© 2004 OGP

Appendix 2: Examples of ‘red flags’

Te following two sections give examples of ‘red flags’ that should be researched and takeninto account when deciding whether to sign an agreement with the company or individualconcerned.

From the applicant’s information:

• A public offi cial holds company shares or other interests in the company in his own right.(Note: It is not unusual for a public offi cial to hold an interest in a company in his offi cialcapacity.)

• A foreign offi cial has recommended the applicant, particularly if that offi cial has discre-tionary authority over the business at issue.

• An offi cer, senior executive or key employee of the company has an interest in anothercompany that might be considered to be a competitor.

• An offi cer, senior executive or key employee of the company is related to an offi cer, senior

executive or key employee of a company that might be considered to be a competitor.• Tere are uncertainties in the business or financial references.

• Te normal terms of business quoted by the company or individual differ to a materialextent to local business terms and conditions.

• Payment instructions quoted by the company or individual include split payments, pay-ments to an apparently unrelated third party, or to a bank account in an offshore taxregime.

• Te company auditors have qualified the accounts produced by the applicant for reasonsthat are relevant to the application.

• Tere 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 corruptionhas been unsuccessfully defended by the company.

• Tere is a current or outstanding criminal case regarding bribery, corruption or a similarcriminal offence, or a current or outstanding civil action regarding bribery or corruption,against a current employee of the company.

• Te individual applying for employment has been convicted of bribery, or a similar crim-inal offence, or has appeared as a defendant in a civil case of a similar nature.

• Te individual applying for employment has a current or outstanding criminal caseregarding bribery, corruption or a similar criminal offence, or a current or outstandingcivil action regarding bribery or corruption.

• Te company or individual discloses previous involvement in insolvency proceedings.

• Tere is a significant difference between the remuneration rate quoted by the company or individual and local market rates for similar goods or services.

• Te applicant advises that he is unable to sign that he will abide by all local and interna-tional laws regarding bribery and corruption and that he cannot abide by the principal’sbusiness ethics policy.

• Te applicant requires that his identity, or if the applicant is a company, the identity of the directors, owners or employees, not be disclosed.




© 2004 OGP

From verifi cation or additional research:

• Qualifications claimed by the company or individual are denied by the issuing body.

• Te issuing body for the claimed qualifications is not a bona fide educational establish-ment or professional body, eg the company or individual can simply purchase the quali-fication without sitting examinations or proving standards of competency.

• Te applicant is found to have had little or no experience in the industry concerned.

• Tere are significant variances between the written business and employment referencesand the interview of the referees.

• Financial referees express reservations regarding the financial probity of the company orindividual in question.

• Due diligence reveals that the applicant is a shell company or has some other unorthodoxcorporate structure.

• Te records from the offi cial registry of companies do not agree with the informationgiven by the applicant regarding ownership of the company, directorships or details inany of the other required offi cial documentation filed regarding the organisation.

• Te company or its immediate or ultimate holding company are registered in an offshoretax haven renowned for its lack of corporate or banking transparency.

• Te owners and/or directors of the company are discovered to be nominees and theapplicant refuses to disclose the real owners/directors.

• Electoral or local business records show a different location for the company or indi-vidual. (Note: Tis may simply mean that the offi cial records are not up-to-date).

• An offi cial body advises a criminal conviction and this conviction has not been disclosedby the individual. (Note: Tis information is not legally available in all jurisdictions).

• Offi cial checks reveal a criminal conviction for bribery, corruption or a similar offence,or a civil action where the company or individual has unsuccessfully defended theiractions and the applicant has not disclosed this case.

• Offi cial checks reveal a current or outstanding criminal case involving bribery, corrup-tion or a similar offence, or a current or outstanding civil action, which has not beendisclosed by the applicant.

• A reputable credit agency has provided a poor credit rating on the company or individualor has advised previous liquidity problems not disclosed by the applicant.

* Te 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 .

Te following red flags are unlikely to reveal themselves until the contract has been signedand some goods or services have been supplied to the principal. Tey should not be dismissedas ‘too late’, but should be considered in terms of the need to potentially cease using or trad-ing with or through the company or individual.




© 2004 OGP

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 explana-tion.

• 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 fl ags:

• A number of complaints regarding non-payment or ethical standards are received fromsub-contractors.

• Reliable sources or media reports suggest inappropriate payments made on behalf of theprincipal.

• Te associate is unable to handle the principal’s business with the quality and quantity of resources at his command.

• Te associate proves to be ignorant of local laws and customs regarding the principal’sbusiness.




© 2004 OGP

Appendix 3: Due diligence &offshore companies

Offshore companiesOffshore Companies are usually defined as those companies that are registered in countriesother than their main place of business. Normally the country of registration will have madespecial provisions regarding taxation of the profits of those companies and simplified thegovernment requirements regarding registration and offi cial records. Many of the recognisedtax havens do not require listings of shareholders or directors to be offi cially filed or, if thereis a requirement to file, no public access to the listings is given. In most cases, strict localbank secrecy laws reinforce the lack of transparency inherent in the government registrationsystems in these countries. Te most common offshore regimes or ‘tax havens’ are:

Anguilla Bahamas

Belize British Virgin IslandsCayman Islands Cyprus†

Gibraltar† Guernsey †

Isle of Man† Jersey †

Liberia Liechtenstein

Monaco Panama†

Seychelles St. Kitts & Nevis

St. Lucia St. Vincent (and Grenadines)

Switzerland urks & Caicos Islands

Western SamoaTis list is not exhaustive; smaller regimes have been excluded.

† NB: Although shareholder and director details are offi cially 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. Tere may, additionally, be a govern-ment requirement for at least one local director.

Transparency

ransparency is essential between the parties in the reputational due diligence process: trans-parency 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 regard-ing the ownership, the offi cers of the company and other details, it is diffi cult for this to beverified through offi cial channels and the use of unoffi cial channels sometimes can result ina breach of local laws. Local bank secrecy laws in the tax havens frequently compound thelack of transparency.

The problem

Companies incorporated in one of these tax havens have long been viewed with suspicionregarding money laundering, bribery and a variety of other illicit financial activities. Whilethese illicit activities are carried out in offshore locations, without a doubt there are alsocompanies incorporated in these locations for legitimate reasons. Because of the reputationthese offshore countries have gained over time, any company seeking to do business with anassociate incorporated or headquartered in one of the countries should use extreme caution.




© 2004 OGP

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 com-panies 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 theonly “red flag”, then a decision to proceed may be considered. In this case, a company mightalso consider the use of some safeguards such as obtaining an outside counsel’s opinion orrequiring 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 under-developed. Tis problem is likely to be compounded by political and financial instability.For these reasons, the financial and commercial services required by the large organisationsinvolved in such developments are sometimes supplied from outside the national boundariesof the developing areas. Banking is one of the main services involved and it is quite usualto find that local banks are merely used as sources of petty cash for disbursements, with allmajor transactions taking place at banks outside the country concerned. Tese services couldtherefore be described as ‘offshore’. Te banking services used by the companies supportingthe major developers are often teamed with offshore company registration. Te principalseeking an associate registered onshore is likely to find the choice severely restricted. In thesecircumstances it would be pointless in ‘marking down’ the offshore companies on the shortlist. 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 torequire prospective associates incorporated in these offshore locations – and not well knownor established by good reputation – to disclose their corporate and ownership informationand to provide their rationale for the formation of the company under the offshore regime.

Tis could be achieved by requiring full disclosure of shareholders, directors and financialstatements by potential associates as part of the reputational due diligence process. A possibleeffect 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 istrue or not.



What is OGP?

Te International Association of Oil & Gas Producers encompasses the world’s leadingprivate and state-owned oil & gas companies, their national and regional associations, andmajor upstream contractors and suppliers.

Vision

• o work on behalf of all the world’s upstream companies to promote responsible andprofitable operations.

Mission

• o represent the interests of the upstream industry to international regulatory andlegislative bodies.

• o achieve continuous improvement in safety, health and environmental performanceand in the engineering and operation of upstream ventures.

• o promote awareness of Corporate Social Responsibility issues within the industry and among stakeholders.

Objectives

• o improve understanding of the upstream oil and gas industry, its achievements andchallenges and its views on pertinent issues.

• o encourage international regulators and other parties to take account of the indus-try’s views in developing proposals that are effective and workable.

• o become a more visible, accessible and effective source of information about theglobal industry – both externally and within member organisations.

• o develop and disseminate best practices in safety, health and environmental per-formance and the engineering and operation of upstream ventures.

• o improve the collection, analysis and dissemination of safety, health and environ-mental performance data.

• o provide a forum for sharing experience and debating emerging issues.

• o enhance the industry’s ability to influence by increasing the size and diversity of the membership.

• o liaise with other industry associations to ensure consistent and effective approachesto common issues.



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guidelines on reputational due diligence

Documents