The Red Scare: Knowledge and the Importance of Due Diligence

Ed. Note-we continue our series of guest posts from our colleague Mary Shaddock Jones, who today looks at the importance of due diligence.

At midnight on November 9, 1989, East Germany’s rulers gave permission for the Berlin Wall, separating East and West Berlin, to be opened up. Ecstatic crowds immediately began to clamber on top of the Wall and hack large chunks out of the 28-mile barrier.

I remember viewing the scene on T.V. It was a momentous moment in world history. For those of you who may not know, while East Germany never officially adopted a “red flag” for its country, on most official buildings, the national flag (black-red-gold with hammer and circle) was flown with a solid red flag flown next to it! Twenty-two years later the “fall of the Red Flag of East Berlin”, seems like distant memory. However, for businesses doing business internationally the “red flag” has once again come to represent a warning or a threat in terms of liability under the FCPA

The Lay Person’s guide to the FCPA published by the Department of Justice warns U.S. firms about their choice of overseas partners and agents. A bad choice is someone who is likely to make corrupt payments. That likelihood, the DOJ says, is usually indicated by warning signs called “red flags.” If there are red flags to start with, and if the intermediary does bribe a foreign official to help the business, the company will have trouble arguing it shouldn’t be responsible for an FCPA violation based on an indirect corrupt payment.

Red flags, as the name suggests are easy to spot, and include such things as: (1) unusual payment patterns or financial arrangements; (2) a history of corruption in the country; (3) a refusal by the foreign joint venture partner or representative to certify that it will not take any action that would cause the U.S ...

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