Is Your MLM Company Read to Go International?

International Articles

Special Report

THE POTENTIAL IMPACT OF "SARBANES-OXLEY ACT OF 2002" ( HR 3763) AND "THE USA PATRIOT ACT OF 2001" (HR 3162) ON MLM COMPANIES IN THE U.S.

If you are a PUBLICLY Traded MLM Company and are currently doing International business or are considering doing International business, you should take careful consideration of the above laws.

The following synopsis is to aid you in understanding the potential impacts and pitfalls, which may occur if you ignore them.

Historical Background:

The MLM industry has traditionally been one of "closing one’s eyes" to what was done by distributors in other countries and BEGIN coordinating international legal and tax implications only AFTER sufficient interest was shown by distributors. This normally meant that distributors were allowed to sign-up, obtain product and get commission checks by "slipping through the cracks" of the U.S. organization or through some other international office location. In other words, the U.S. company just said it was NOT responsible and took the stance of "well everyone else does it".

Besides the local laws in the various countries, which may be broken, there is NOW even a GREATER risk for MLM companies and their owners, particularly those which are publicly traded and must comply with Sarbanes-Oxley Act of 2002. In addition, ALL MLM companies are at a GREATER risk from these unregulated international distributor activities from the USA Patriot Act Title III- International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001.

To understand these risks it is best to review what the intent of the above laws are for and how independent distributors of an MLM company can put a company at risk.
Auditor and Banker Relationship Changes:

1. Auditor Relationships:

Prior to Sarbanes-Oxley, Independent Auditors were really responsible to the company they represented to accurately report financial transactions and secondarily to the general public interest.

In a Post Enron/WorldCom world, this is no longer true. Your REGISTERED Auditors are responsible to the Public Accounting Oversight Board and are held responsible to report to them in order to MAINTAIN their registrations.

“those items which may be necessary or appropriate in the public interest or for the protection of investors (sec 103 a.1)
They must report what they see as “material weaknesses in internal controls and any material noncompliance” (Sec103, a.2.A.III)
Monitoring of professional ethics…(Sec103, a.2.B.i)

Registered Auditors may be disciplined by the Public Accounting Oversight Board for “any act or practice, or OMITTED act, in violation of this Act (Sec 105).

Sec 406 defines a code of ethics for both Corporate Officers and Registered Auditors as "such standards as are reasonably necessary to promote (1) honest and ethical conduct" and (3) compliance with applicable governmental rules and regulations.

This codification would also seem to imply the Patriot Act of 2001 should be combined as part of the code of ethics. In other words, if you are accepting sales from Foreign residents and paying commissions without meeting the requirements of THAT Law you can NOT certify as it may have a "material impact on investors" and does not provide internal controls related to sales, accounting and payment of commissions.

Certainly, accurate reporting of Sales and where they come from can be "materially important to investors". Also the risk related to international markets or letting Independent distributors do essentially anything they wish in international locales is of "material impact to investors".

Finally, there is consideration in this Act for a study to determine if it should be required to ROTATE Registered Auditors for a firm. Should this come to play, MLM firms may find their Auditors this year say they are compliant in these matters, BUT the next rotation, or the next rotation after that may take a different view, and consider the business practices a material weakness and report it. It is undetermined whether the Study will recommend such a Rotation, but the prudent MLM company will make sure they place themselves in the minimum practical risk.

2. Banker Relationships

The USA Patriot Act of 2001 (following the 9/11 attack) places new requirements on financial institutions to act and "VERIFY" the identity of real parties in interest to financial transactions. Although the form this will eventually take, and the ability to verify individuals who receive funds from the U.S. may be difficult, the Act has several things which can clearly be seen to affect MLM companies who do international business by just "letting distributors do it on their own".

First, Banks or any financial institution issuing debit cards/credit cards or any type of account can be required to provide data on account holders within 120 Hours of a request by government authorities. This short time span means CORRECT INFORMATION MUST BE ON FILE.

From Sec 319 --- 120-HOUR RULE- Not later than 120 hours after receiving a request by an appropriate Federal banking agency for information related to anti-money laundering compliance by a covered financial institution or a customer of such institution, a covered financial institution shall provide to the appropriate Federal banking agency, or make available at a location specified by the representative of the appropriate Federal banking agency, information and account documentation for any account opened, maintained, administered or managed in the United States by the covered financial institution

(There is no time to gather or correct data if an MLM firm decides just to ac cept any application information (correct or not) and pay commissions via debit or other cards instruments to distributors. As a result the Bank may be in violation and the MLM company may find its banking relationships imperiled.).

Second, "Verification of Identification" is also required by Financial Institutions as follows (per sec 326)

MINIMUM REQUIREMENTS- The regulations shall, at a minimum, require financial institutions to implement, and customers (after being given adequate notice) to comply with, reasonable procedures for--

(A) verifying the identity of any person seeking to open an account to the extent reasonable and practicable;

(B) maintaining records of the information used to verify a person's identity, including name, address, and other identifying information; and

(C) consulting lists of known or suspected terrorists or terrorist organizations provided to the financial institution by any government agency to determine whether a person seeking to open an account appears on any such list.

This section continues with a study and report is being required by Congress that will:

(1) determining the most timely and effective way to require foreign nationals to provide domestic financial institutions and agencies with appropriate and accurate information, comparable to that which is required of United States nationals, concerning the identity, address, and other related information about such foreign nationals necessary to enable such institutions and agencies to comply with the requirements of this section;

(2) requiring foreign nationals to apply for and obtain, before opening an account with a domestic financial institution, an identification number which would function similarly to a Social Security number or tax identification number; and

(3) establishing a system for domestic financial institutions and agencies to review information maintained by relevant Government

The Impact of these Sections on MLM companies may include use of Debit/Credit Cards in the U.S., banking relationships, the common practice of False Security Numbers on accounts or failure to provide "Verifying Information."

Material risk to banking relationships (which may affect overall certification for Sarbanes-Oxley)
Are W-8 BEN forms sufficient data?? The answer appears to be NO, as they provide NO UNIQUE DATA for verification. Only address, name, and country. Besides the W-8 BEN FORM Distributor applications and software databases should REQUIRE and STORE Birth date, Local Country Citizen ID Number or Passport Number. (Applications without these additional entries should be rejected.)
Debit Cards with multiple companion cards and established U.S. Bank accounts, are at particular risk since identity can NOT be verified for who the companion card goes to. (This is a very high risk for MLM companies who gather customers and distributors from every walk of life.). The scenario is: I obtain a debit or credit card with companion card, which can be linked to a U.S. bank account. Moneys are transferred from ANY U.S. bank account to the card and withdrawn by persons unknown and unverified on the companion card.) This is a very High Risk area.

Conclusion:

The World has changed and the Laws of the United States with regards to certification of business practices and payment of funds outside of the United States continue to change.

MLM companies MUST take into account their business practices and take positive PROACTIVE steps to control their distributors individual international activities or find themselves the target of their own Auditors and Bankers, as they are held legally responsible in their individual areas.

R&R International Consulting is a division of EDGE Consulting Inc.