How to Vet Third Parties Before They Get Your Company Charged
Agents, Consultants and Middlemen: How to Vet Third Parties Before They Get Your Company Charged
A practical due diligence guide for Malaysian businesses on agents, consultants, distributors and other third parties under section 17A of the MACC Act 2009
Introduction
Every industry has them. The “consultant” who says he knows the right people at the ministry. The agent who promises to deliver the tender for a 10 per cent success fee. The distributor overseas who “handles the local authorities” so that you do not have to. The middleman who wants his fee paid to a company in another country.
Many Malaysian businesses still think that if a third party pays a bribe, it is the third party’s problem. That has not been true since 1 June 2020. Under section 17A of the Malaysian Anti-Corruption Commission Act 2009 (MACC Act), a company can be prosecuted when a person who performs services for it pays a bribe to win or keep business for the company. Its directors and senior managers can be treated as personally guilty too.
In real cases at home and abroad, agents and consultants are among the most common routes for bribes. This guide explains why your third parties are your legal risk, how bribes are disguised as “consultancy fees”, what the Malaysian courts have said about paying for influence, and a step-by-step vetting process you can put in place today.
Why your third party’s bribe is your company’s problem
Section 17A makes a commercial organisation guilty of an offence if a “person associated” with it corruptly gives, agrees to give, promises or offers gratification to anyone, intending to obtain or retain business, or an advantage in the conduct of business, for the organisation. Liability is strict. The prosecution does not need to show that the board knew about the bribe.
Who is an “associated person”?
The MACC Act defines it in two ways:
- a director, partner or employee of the company, or
- a person who performs services for or on behalf of the company.
The Act does not list who falls within the second group. It says the question must be decided by looking at all the circumstances, not only at the label given to the relationship. In other words, substance matters more than form. Calling someone an “independent contractor” or a “business development partner” will not take him outside section 17A if, in reality, he is acting for your company.
Guidance on the UK Bribery Act 2010, on which section 17A is modelled, suggests that this group can include agents, consultants, contractors and, in a supply chain, the party you contract with directly. A subsidiary can also be an associated person if it performs services for the parent and the bribe is meant to benefit the parent. In R v Sweett Group, a UK parent company was penalised £2.25 million for bribes paid by its subsidiary to win a hotel construction contract in Abu Dhabi without a tender.
The benefit to your company also need not be direct. Section 17A covers gratification given for the benefit of the person offering it or any other person. The test is whether the bribe was intended to win or keep business, or an advantage in the conduct of business, for your company.
The cost of getting it wrong
| Who | Exposure |
|---|---|
| The company | A fine of at least ten times the value of the bribe or RM1 million, whichever is higher. The only defence is to prove that it had adequate procedures in place. |
| Directors, controllers, officers, partners and managers | Deemed to have committed the same offence, unless each proves that it happened without his consent or connivance and that he exercised due diligence to prevent it. |
| The contract won | A contract to pay for influence or to pay a bribe is void and cannot be enforced, as the Merong Mahawangsa case shows. |
| The business | Reputational damage, loss of future contracts and, under AMLA, possible freezing of the money involved. |
The first company charged under section 17A in Malaysia, Pristine Offshore Sdn Bhd, was charged on 18 March 2021 over a bribe of RM321,350 allegedly given to secure a subcontract from Petronas Carigali Sdn Bhd. Its former director was charged separately.
How third parties are used to hide bribes
Enforcement cases in the UK, where companies have faced similar “failure to prevent bribery” offences since 2011, show a clear pattern. The bribe rarely goes directly from the company to the official. It goes through someone in the middle.
| Case | How the middleman was used | Lesson |
|---|---|---|
| Airbus (UK) | Intermediaries paid by commission per aircraft. US$16.84 million offered to an intermediary’s “straw” company in the Sri Lankan Airlines deal. A close relative of a senior Ghanaian Government official engaged with a success fee of about €5 million. | Airbus had written third-party policies and an anti-corruption compliance certificate, yet the policies were bypassed. |
| Glencore (UK) | An agent operated through his own company. Addendums to the service agreement were used to advance money for bribes, recorded as “service fees”. | Look behind invoices labelled as fees or services. |
| Airline Services (UK) | An agent who was supposed to be acting for the customer, Lufthansa, was described inside the company as “our man” and passed on confidential tender information and rivals’ prices. | Be very wary of an agent who also works for, or is close to, the customer. |
| Petrofac (UK) | Senior executives paid officials through agents so that the group would win oil contracts in Iraq, Saudi Arabia and the UAE. Senior officers could overrule the compliance team’s objections to appointing an agent. | Compliance must have real authority over third-party appointments. |
| Rosmah Mansor (Malaysia) | A 15 per cent cut of a RM1.25 billion project was to be paid under a “consultancy agreement” with a Taiwanese company that provided no real consultancy services. | A consultancy agreement can be a cover for a bribe. |
| Remember: These UK cases were resolved under the UK Bribery Act 2010. They are described here, as in the book Corporate Liability for Corruption in Malaysia, because section 17A is modelled on that Act and Malaysian courts may find them persuasive. |
Legitimate agent or influence peddler?
Not every agent or consultant is a problem. Companies use sales agents, distributors, customs brokers and consultants every day for good reasons. The question is what you are really paying for.
In Merong Mahawangsa Sdn Bhd v Dato’ Shazryl Eskay bin Abdullah, the Federal Court drew the line clearly. Using an intermediary to lobby for contracts can be a recognised and respectable practice. But it is against Malaysian public policy for a person to be paid to use his position and connections to obtain a benefit from the Government, because selling influence breeds corruption and undermines public confidence. Such an agreement is void under section 24(e) of the Contracts Act 1950, and the courts must refuse to enforce it even if neither party raises the point.
| Likely legitimate | Warning signs of selling influence |
|---|---|
| Paid for skills, labour or expertise you can describe and check | Paid mainly because he “knows” a minister, official or decision maker |
| Fee reflects market rates for the work done | Large success fee tied to winning a Government award or approval |
| Clear deliverables and reports | Vague services such as “facilitation”, “liaison” or “assisting with approvals” |
| Open about his role and his fee | His role or fee must be kept hidden from the decision maker |
| Paid to his own business account against proper invoices | Wants payment in cash, in advance, or to another company or country |
Red flags to look out for
Drawing on the cases above, treat any of the following as a reason to dig deeper before signing or paying:
- The third party was recommended, or insisted on, by the customer or the official making the decision.
- The third party, its owners or its directors are related to, or close to, a public official or a politically exposed person (PEP).
- The fee is a percentage of the contract value or is payable only if the contract is won, especially in Government projects.
- The fee is out of proportion to the work described, or there is little evidence of real work.
- Payment is requested to a company other than the one you contracted with, to an offshore company or to a bank account in a third country.
- The services are described vaguely, or the third party has no track record in the field.
- The third party refuses to sign anti-corruption clauses or declarations, or will not reveal its owners.
- Requests for urgent advance payments, extra “success” payments or unexplained amendments to the agreement.
A step-by-step vetting process
| STEP 1 | Justify the need |
Before appointing anyone, ask why the company needs this third party and what it will actually do. Write the answer down. After its bribery scandal, Rolls-Royce required a business justification for every intermediary, along with external due diligence and approval by a panel that included an independent expert. It reviewed 250 intermediary relationships and suspended 88 of them.
| STEP 2 | Find out who they really are |
Check the company’s registration, directors and shareholders. Go further and identify the individuals who ultimately own or control it, known as the beneficial owners. The same idea appears in section 16 of AMLA, which requires banks and other reporting institutions to take reasonable steps to verify the real people behind a corporate customer. Ask specifically whether any owner, director or key staff member is a public official, a politically exposed person, or a family member or close associate of one. Bank Negara’s guidelines treat PEPs, their families and close associates as higher risk for this reason.
| STEP 3 | Check their background and get declarations |
Search for adverse news, ask for references and check their track record. Ask the third party to sign a declaration of interest and a declaration on criminal records and MACC investigations. The book Corporate Liability for Corruption in Malaysia sets out sample declarations that companies can adapt.
| STEP 4 | Test the fee |
Good practice, reflected in the adequate procedures checklist in the book Corporate Liability for Corruption in Malaysia, is that payments to third parties should be reasonable and proportionate to the work, services or supplies actually provided, and paid through genuine channels. Compare the fee with market rates. Be especially careful with success fees and commissions. Even before its scandal, Rolls-Royce required extra approval where a payment exceeded 5 per cent of the contract price and banned commissions above 10 per cent. Those rules failed only because they were not followed.
| STEP 5 | Put it in the contract |
Include clauses in which the third party:
- warrants that it will comply with the MACC Act and your anti-corruption policy
- declares its interests and any conflicts, and confirms it has no criminal record or pending MACC investigation
- agrees that you may terminate immediately, without compensation, if it breaches the MACC Act or your policy
- indemnifies your company against fines, losses and claims arising from its breach
- provides proper invoices and supporting documents showing the work actually done
| STEP 6 | Approve at the right level and keep records |
Approval of high-risk third parties should not rest with one person, and certainly not with the person who will benefit from the deal. The compliance function must be able to say no. Petrofac’s failures included a compliance function that senior officers could simply overrule. Keep the due diligence file, approvals and reasons. If the MACC ever comes knocking, this file is your evidence of adequate procedures.
| STEP 7 | Pay properly |
Pay only the contracting party, into a bank account in its own name, against invoices that match the agreed work. Avoid cash. Question any request to pay a different company or to pay in a different country. Glencore’s “service fees” and the Rosmah Mansor “consultancy fee” show how payment paperwork can be used to dress up bribes.
| STEP 8 | Monitor, train and re-check |
Due diligence is not a one-off exercise. Re-check high-risk third parties regularly, especially on renewal or when the scope of work changes. Train them on your policy. Airline Services was given checklists and a draft anti-corruption policy by its external advisers, held a single training session, then chose “a different approach” and did not implement the rest. The court found its procedures woefully inadequate.
| STEP 9 | Act on warning signs |
If something looks wrong, stop further payments, investigate quietly with legal help and consider reporting to the MACC. In the Amec Foster Wheeler case, the board discussed a lawyers’ risk report on possible corruption but chose not to report it, and similar wrongdoing soon started again elsewhere. The UK court condemned that failure. In Malaysia, anyone who is offered or asked for a bribe also has a legal duty to report it under section 25 of the MACC Act.
A proportionate approach for SMEs
Small and medium enterprises do not need the compliance machinery of a multinational, but they do need the basics. The Guidelines on Adequate Procedures are meant to be applied in proportion to a company’s size and risk. The National Centre for Governance, Integrity and Anti-corruption (GIACC) has published a case study on companies that rely heavily on contractors, suppliers and joint venture partners. Transparency International Malaysia’s guidance includes a simpler programme for SMEs. The International Chamber of Commerce’s RESIST guide sets out 22 practical scenarios, including dealing with intermediaries, on how to prevent and respond to bribe demands.
What the courts have said
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CASE SPOTLIGHT Merong Mahawangsa Sdn Bhd & Anor v Dato’ Shazryl Eskay bin Abdullah [2015] 5 MLJ 619 (Federal Court) |
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What happened: A company wanted to secure a privatised project to build a bridge to replace the Johor-Singapore Causeway. It signed a letter of undertaking to pay a businessman RM20 million for his “services” in procuring the award from the Government. The businessman admitted in his own pleadings that he had used his influence and close relationships with named Federal Ministers to get the project. When the project was later scrapped and the company did not pay, he sued, and the Court of Appeal ordered the company to pay the RM20 million. What the court decided: The Federal Court allowed the company’s appeal. It held that hiring a person, for money, to use his position and connections to obtain a benefit from the Government is against Malaysian public policy, so the undertaking was void under section 24(e) of the Contracts Act 1950. The court stressed that judges must take notice of illegality at any stage, even if no one raises it. It also made clear that the problem is the sale of influence, not the use of intermediaries as such. Why it matters to you: A “consultant” whose real product is access to decision makers is a legal liability. The agreement cannot be enforced by either side, and the arrangement may also expose the company to criminal investigation. Pay third parties for genuine, documented work, not for who they know. |
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CASE SPOTLIGHT Wong Hon Leong David v Noorazman bin Adnan [1995] 3 MLJ 283 (Court of Appeal), overruled on the illegality point by Merong Mahawangsa |
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What happened: A company director wanted his land converted and subdivided quickly for a housing project. He agreed to pay RM268,888 to a man who claimed to be acquainted with the Menteri Besar of Selangor. The man obtained the Menteri Besar’s handwritten support on the application, which was later approved. The director paid RM100,000 and then refused to pay the rest, claiming the money was really a bribe. What the court decided: In 1995, the Court of Appeal ordered the director to pay. It found no independent evidence of bribery, noting that he had not made a police report at the time and raised the allegation only during the court case. The trial judge had also warned that by claiming he paid a bribe, the director was effectively admitting a crime. In 2015, however, the Federal Court in Merong Mahawangsa expressly overruled Wong Hon Leong on the illegality point, holding that it had failed to consider the public policy against selling influence. Why it matters to you: This case shows the trap from both sides. The company paid for connections, then could not escape the bill without implicating itself. Today such an agreement would be treated as void. Either way, the company loses. The safer course is not to enter into it at all. |
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CASE SPOTLIGHT Public Prosecutor v Rosmah binti Mansor [2022] 9 CLJ 83 (High Court, Kuala Lumpur) |
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What happened: Jepak Holding Sdn Bhd wanted a RM1.25 billion solar hybrid project for 369 rural schools in Sarawak. Its founder and an associate approached the special officer of the then Prime Minister’s wife, saying they wished to make a “political donation” of 10 per cent of the project value to the then Prime Minister. According to the evidence accepted by the court, she asked, through her special officer, for 15 per cent, or RM187.5 million. To cover the payment, a consultancy agreement was signed between Jepak and a Taiwanese company under which Jepak would pay 15 per cent of the project value as a “consultancy fee”. The project was later awarded by direct negotiation, and RM5 million and RM1.5 million in cash were delivered to her residences. What the court decided: The High Court held that a bribe can be solicited through an intermediary, here her special officer. It found that the payments were not political donations and that the consultancy agreement had been concocted to disguise their true nature. She was convicted on all three charges and sentenced to ten years’ jail and fines totalling RM970 million. Her appeal to the Court of Appeal was still pending at the time of writing. Why it matters to you: Look at this from the company’s side. Jepak’s project depended on middlemen, an aide and an offshore “consultant” paid a percentage of the contract with no real services. Every one of these is a red flag in this guide. Since 1 June 2020, a company that pays a bribe this way also risks corporate liability under section 17A. |
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CASE SPOTLIGHT Tengku Adnan Tengku Mansor v Public Prosecutor [2022] 1 CLJ 917 (Court of Appeal) |
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What happened: A Federal Territories Minister asked a developer involved in a Government affordable housing project for what he described as a political donation for two by-elections. The developer issued a RM2 million cheque, not to the political party, but to a company 99.9 per cent owned by the Minister. The High Court convicted the Minister under section 165 of the Penal Code, describing the company as a façade for receiving the money. What the court decided: By a majority, the Court of Appeal set aside the conviction. It held that the trial judge had failed to consider prosecution witnesses, including the developer himself, who said the money was a political donation to the party, and had not given proper weight to an official party receipt. The dissenting judge would have upheld the conviction, pointing out that the money went to the Minister’s own company and not to the party. The prosecution filed a further appeal. Why it matters to you: Whatever the final outcome, the developer and his company spent years at the centre of a high-profile corruption trial because a payment linked to a Government project went to a company owned by the decision maker. Never pay a company or person connected to an official who has dealings with your business, whatever the payment is called. If any contribution is genuinely lawful, make sure it goes to the right entity and is fully documented. |
Frequently asked questions
Can my company really be charged for what an outside agent did? Yes. If the agent performed services for or on behalf of your company and paid a bribe to win or keep business for it, your company can be charged under section 17A, even if no one in management knew.
Are success fees illegal? Not in themselves. But a large success fee tied to winning a Government contract, particularly where the agent’s value lies in his connections, is a major red flag and may make the agreement void as a sale of influence.
Is a clause in the contract enough to protect us? No. Anti-corruption clauses show commitment and give you rights to terminate and claim, but they do not by themselves amount to adequate procedures. You must also vet, approve, monitor and act on warning signs.
What if our subsidiary or joint venture partner pays the bribe? A subsidiary or joint venture can be an associated person if it performs services for your company and the bribe was intended to benefit your company. The degree of control you have over it is relevant.
We are a small company. Do we have to do all this? The steps should be proportionate to your size and risk, but every company, however small, should at least know who it is dealing with, check the fee, use proper contracts, pay properly and keep records.
We already have an agent we are now worried about. What should we do? Hold further payments where you lawfully can, review the file, ask for supporting documents and take legal advice on whether to terminate the relationship and report the matter.
Conclusion
Agents, consultants and middlemen can open doors for a business, but under section 17A the wrong ones can also lead your company and its directors to court. The cases show the same story again and again: a third party valued for its connections, a fee based on success, a vague consultancy agreement, and a payment routed somewhere it should not go. Proper vetting before you sign, sensible controls on payment and ongoing monitoring are what separate a defensible business relationship from a corporate liability charge.
If your company relies on agents, consultants or distributors, or you are unsure about an existing arrangement, speak to a lawyer before your next payment. Our team can review your third-party relationships and contracts, and help you put adequate procedures in place.
Disclaimer: This article is for general information only and does not constitute legal advice. The law and its application may change, and every case depends on its own facts. Please seek specific legal advice before acting on any matter discussed here.
Keywords:third party due diligence Malaysia, agent due diligence, consultant bribery risk, section 17A MACC Act associated person, corporate liability corruption Malaysia, middleman bribery, success fee commission corruption, influence peddling contract void, Merong Mahawangsa section 24 Contracts Act, consultancy agreement disguise bribe, Rosmah Mansor solar case, adequate procedures third parties, beneficial ownership check, politically exposed person PEP, anti-corruption clause contract Malaysia, vendor due diligence SME Malaysia, rasuah ejen orang tengah
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