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How To Avoid Self-Dealing At A Business

If you want to see a business lawyer get their antenna up quickly regarding risks in a situation, mention the concept of self-dealing. Even the hint of self-dealing can be disastrous for an enterprise, and business lawyer services providers go out of their way to prevent these sorts of scenarios. You may have some questions, though, about what self-dealing is, whether it might apply to a particular situation, and how to prevent it.

What Is Self-Dealing?

Self-dealing occurs when someone with a fiduciary obligation to a business engages in activities meant to enrich themselves rather than benefit the company. Consider an extreme example of self-dealing: a bank manager who awards himself a personal loan.

This is considered self-dealing because the manager lacks the necessary independence in the decision-making process. He has ample opportunity to give himself an interest rate well below market, and he might also be able to leverage the loan far beyond what is acceptable. Such activities could clearly harm the bank's interests by putting the bank below reserve requirements and failing to properly compensate for the inherent risk.

Does It Apply to Your Situation?

Folks who are classified as fiduciaries have to be especially careful of even the slightest appearance of self-dealing. At most businesses, fiduciaries are the officers, executives, and shareholders. Some other parties, such as appointed representatives, account managers, and those involved in investment, may also be classified as fiduciaries either by the government or through signed agreements.

Individuals in these categories should try, whenever possible, to focus on profiting from appropriate compensation for their roles. Acceptable compensation includes salaries, wages, stock options, and bonuses. Anything outside those boundaries runs a major risk of being a form of self-dealing.

How Can You Prevent Self-Dealing?

Foremost, it's critical that all people with decision-making roles at a business have clearly defined jobs and titles. It's best to have a business lawyer draw up an agreement for them to sign before entering into their roles, too. This will provide the necessary documentation to ensure they can't claim they weren't properly informed of their fiduciary duties.

It's also important that all parties fully disclose their potential conflicts of interest. Suppose a member of a construction company's board was also a member of the city council's zoning commission. This should be clearly disclosed as a potential conflict of interest. Appropriate measures, such as having the board member recuse themselves from all city-related decisions or discussions, can then be implemented.