Most franchisors have thorough financial vetting requirements before allowing any person or business to become a franchisee. However, how many of these same businesses perform compliance due diligence on their prospective overseas franchises? How many U.S. franchisors have compliance training programs? How many evaluate, on an ongoing basis, the compliance program of their overseas franchisees? How many U.S. franchisors have a compliance hotline or other reporting mechanism for any compliance violations made against their franchisees?
Some issues include health and wage compliance officials who may appear during routine health inspections or local wage and hour compliance determinations; intellectual property officials, as maintaining intellectual property rights is critical for any franchise model; utility officials as every franchise operation needs power maintained; and government procurement officials if the franchise is selling to a foreign government or state owned enterprise.
How would all of this play out for a franchisor? As a franchisor moves into foreign markets there could well be the temptation to “grease the skids” and make payments or offer gifts to government officials, or their family members, to get the permits or permissions necessary to open and operate. In many countries, bribery is a common way of getting business done, and there can be tremendous pressure from local agents or franchisee candidates to follow regional customs and use bribes to become or remain competitive. Even if it is not the U.S. franchisor’s own employees that engage in the FCPA violations, the U.S. franchisor will still face the risk of an enforcement action if the franchisee’s employees engage in such conduct.
Three key takeaways:
- Franchises can bring an unexpected level of FCPA exposure.
- Franchisors must have more than financial vetting for potential franchisees.
- Use your compliance tool kit for business ventures in managing the FCPA risk for franchises.
