Avoiding FCPA Pitfalls When Entertaining Foreign Officials

Conducting business abroad can be complex enough because of differing languages, cultures and laws. Throw in maintaining compliance with U.S. anti-corruption rules when spending money on foreign officials, and the complexity multiplies.

Persistent enforcement of the Foreign Corrupt Practices Act (FCPA) by the Department of Justice and the Securities and Exchange Commission has companies looking over their shoulders. With so much business transpiring overseas, how are employees to know when the gifts, travel and entertainment they provide to foreign officials look more like bribes than an honest token of esteem or gratitude? And how are companies that have foreign subsidiaries, or who employ agents or consultants abroad, able to monitor far-off conduct that can lead to an FCPA investigation? It is up to companies, with the guidance of knowledgeable legal counsel, to establish policies and procedures for preventing, tracking and recording spending that may breach the FCPA line. Promulgating and adhering to internal controls designed to monitor the company’s gifts, meals, entertainment, and travel expenditures can make the difference between compliance and a hefty fine or even prison.

What the FCPA Allows

The FCPA does not ban gifts and travel. However, it prohibits payment of bribes, including those disguised as gifts. Most companies and their employees are clear that large payment for gifts, travel and entertainment can constitute FCPA violations, if they are given to government officials or to employees of state-owned enterprises to obtain or retain business. But such awareness has not always halted the violations. According to the DOJ/SEC FCPA Resource Guide, some major enforcement actions have included:

• A $12,000 birthday trip for a Mexican decision maker that included dinners and visits to wineries
• $10,000 spent on dinners, drinks, and entertainment for a government official
• A sightseeing trip to Italy for eight Iraqi government officials that included $1,000 in “pocket money” for each official
• A chauffeur-driven trip around Paris for a government official and his wife

The waters get murky, however, when smaller expenditures are involved. That is where company policy and procedures have the most impact.

Greg Husisian, a partner at Foley & Lardner LLP in Washington, D.C., consistently has clients who inquire about red flags for gifts and other expenditures, particularly the increasing use of gift cards. These issues continue to be a special problem in China. Husisian noted that China is not necessarily the most corrupt country around (it actually ranks 127^th out of 177 in the latest Transparency International index of perceived corruption), but the impact of corruption is much higher in China because it is a huge magnet for business. In China and in many locations around the world, companies want to grow quickly, often need government approvals to do so and think they’ll be at an unfair disadvantage if they don’t shell out gifts, all of which adds up to a complex problem for most companies, he said.

Policies and Procedures

Strategies for dealing with the corruption question have evolved. Years ago, companies found it sufficient to have an FCPA policy, Husisian said. Then they expanded it to cover commercial bribery in the wake of the United Kingdom Anti-Bribery Act. From there, companies learned that it was not enough just to have a policy but that they needed training and good internal controls. Now, he counsels clients that they must have a gift, meals/entertainment and travel policy—one that involves not just procedures for booking travel and getting reimbursed, but rather one that establishes a set of internal controls to allow for the pre-approval of payments to government officials and employees of state-owned entities, the tracking of such expenses, and the accurate recording of the amount, recipient, and business purpose of such expenses.

To accomplish these tasks, Husisian said a gifts, meals and travel policy generally should include language:

• Providing strict dollar limits on spending for gifts, entertainment and travel, to eliminate any ambiguity
• Requiring a strict business purpose for any such spending
• Forbidding the use of gift cards and cash
• Requiring prior approval for expenditures that present tricky FCPA issues, including those made to government officials and employees of state-owned enterprises and repeat expenses related to the same person
• Requiring accurate bookkeeping and records that provide the company enough information to track the recipient of the expense, the business purpose, the total amount of any disbursement and reimbursement and the identity of the recipient—tracking all information related to such expenses and reimbursements is important in case the government ever comes calling

For pre-approvals, some companies establish a tiered structure. For example, expenditures up to $200 receive a low-level review. The greater the expenditure, the higher the level of review.

In addition to an approval and review process, Husisian said companies need the expenditures to be recorded in a central repository, where someone examines them, perhaps quarterly, to unearth suspicious or non-compliant payments. This second layer of review is particularly important if someone in the lower rungs signs off on expenditures, he said. In fact, the DOJ occasionally holds individuals within companies personally responsible for FCPA violations.

Gift Giving

Implementing a gifts, meals, entertainment and travel policy along these lines is in accord with U.S. Government expectations. The DOJ/SEC guide acknowledges that “a small gift or token of esteem or gratitude is often an appropriate way for business people to display respect for each other.” It suggests gifts be:

• Given openly and transparently
• Properly recorded in the giver’s books and records
• Provided only to show gratitude or esteem
• Permitted under local law

When drafting a policy, it may be beneficial to list specific examples of what type of expenditure is permitted and what is not. The DOJ/SEC guide says providing items of nominal value—cab fare, reasonable meal and entertainment expenses, or company promotional items, is “unlikely to improperly influence an official, and, as a result, are not, without more, items that have resulted in enforcement action by DOJ or SEC.” On the other hand, larger gifts and gifts to the family members of foreign officials are a red flag. Such restrictions should be reflected in any gifts, meals, entertainment and travel policy.

Husisian noted that gifts to foreign officials are almost always more problematic than providing meals and entertainment. It is easier, he said, to demonstrate that business was discussed during a meal, while gifts are more easily construed. Where government regulators are concerned, it can be difficult to answer questions such as, “What is the business purpose of a crystal vase?” He cautioned companies to monitor not only expensive individual gifts but the number of gifts going to the same party.

Travel

Travel is also problematic because it is somewhat more unusual for a company to pay for someone’s travel, Husisian said. The U.S. Government appears to be especially skeptical of any paid-for travel that involves a spouse or a family member of a government official or employee of a state-owned entity, since the business purpose of these additional people is difficult to discern. If paid-for travel appears to be appropriate, it is important that the company gets a sign-off from the state-owned or government agency involved. As noted above, the DOJ/SEC guidelines talk about the importance of any transaction being open and transparent, and if a boss signs off on it, it is less likely to appear to the DOJ like a quid pro quo to obtain or retain business.

The DOJ has issued guidelines through two 2007 Opinion Releases that outline travel payment rules. Pursuant to the guidance in these Opinion Releases, companies should:

• Let the foreign government decide who will travel
• Minimize expenditures by reimbursing only for economy class airfare
• Limit travel to the officials, not their family members
• Avoid side trips and other non-business entertainment
• Reimburse only modest expenses, and only with receipts
• Provide souvenirs of nominal value, preferably with the company logo
• Spend money only on legitimate training

Entertainment

While it does not provide specific guidelines on business entertainment expenses, the DOJ takes a close look at them. Companies must ensure the expenses are reasonable, and do not go overboard, Husisian cautioned. Make certain that the entertainment expenses are permitted by local law and custom, and, of course, by company policy. The expenditure must be appropriately documented. And above all, the company should be certain that there is no quid pro quo involved. Any time the entertainment is intended as a specific inducement to obtain or retain business or to influence a decision of the recipient, or to reward past favors, then the expense should be viewed as highly problematic.

Reviewing and Auditing

Establishing a reviewing process is critical to maintaining compliance. This is where companies are concentrating considerable effort. Husisian said that in the past, only a few companies (generally, publicly traded companies subject to the FCPA’s books and records provisions) had such a process. Now, it is common for publicly traded companies to have such procedures, and more and more private companies are adopting them as well. Even if these private companies are not subject to the book and records requirements of the FCPA, many now realize that maintaining accurate book and records, and confirming that internal controls related to potentially corrupt payments are followed, are a prudent exercise in risk management.

Husisian said he could not stress strongly enough that this auditing should extend to third-party intermediaries, such as consultants, who act on the company’s behalf. Nearly all FCPA settlements over the last five years have involved some form of payments made through third parties. Companies must treat them as a major risk point given how many enforcement issues they have been involved in, he said. This problem is not going away. Simply relying on representations and certifications to control their conduct, without taking further steps to ensure that these promises of compliance in fact are being followed, can be a recipe for disaster. The occasional audit, with the targets chosen based on levels of perceived risk, can be a prudent part of the company’s risk management.

Compliance Training

Another critical component to the compliance process is training—for employees and third parties. Many companies already provide anti-corruption training to enforce FCPA prohibitions. Husisian said this training should be enhanced to include education about gifts, entertainment and travel policies.

“The goal is not to create law professors; it is just to get them to know when to pick up the phone when something doesn’t seem quite right. Instead of focusing on just how the FCPA works, good training will also explain why the company has adopted special procedures for gifts, meals, entertainment, and travel, how the procedures operate, and how they are essential to help the company comply with the FCPA.”

Training also should include information on complying with foreign laws, as more and more countries pass FCPA-like rules that may result in foreign investigations. With countries such as Brazil and even China now becoming much more active on the anti-corruption front, Husisian says that the chances of companies being involved in multi-jurisdiction defense of bribes is going to become much more common in the future. In some cases, these laws go beyond the requirements of the FCPA, such as by banning facilitating payments or extending to commercial bribery. A company that only is compliant with the FCPA’s requirements risks being out of tune with the full range of laws that govern its conduct.

Reporting Potential Problems

A well-trained employee will be on the lookout for potential violations. It is imperative that the training include information about reporting them and what to expect from the process. Companies with employees in a position to violate the FCPA should institute multiple avenues for flagging potential problems. Reporting via whistleblower hotlines, online, through a supervisor, to the legal department, by telephone, by e-mail to a compliance inbox or through an independent monitoring service are all possible means for companies to make employees comfortable in raising an alert. Such reporting should be available at all times of day and in the languages commonly used by the company (i.e., a company with operations in China or Latin America should allow for reporting in Mandarin or Spanish).

Penalties Can Be Serious

When crafting policies and procedures and conducting training, it is always beneficial to remember that the goal is to avoid damaging fines and publicity. Some high-profile FCPA enforcement actions involving gifts, entertainment and travel include:

• An oilfield services company agreed in November to pay more than $250 million to settle charges it authorized bribes and improper travel and entertainment for foreign officials in the Middle East and Africa to win business.
• An Ohio-based manufacturer of ATMs and bank security systems, agreed in October to pay $48 million to settle allegations that its subsidiaries bribed officials at government-owned banks in China and Indonesia with pleasure trips. The SEC said the subsidiaries spent $1.8 million on travel, entertainment and other improper gifts for senior officials with the ability to influence the banks’ purchasing decisions. Their expenditures were falsely recorded in the company’s books and records as legitimate training expenses. One subsidiary provided dozens of officials with annual cash gifts of less than $100 to more than $600. The SEC further alleged that the company falsified books and records to hide approximately $1.2 million of bribes paid to employees at privately owned banks in Russia.
• A worldwide drilling services and project management firm, agreed to pay more than $15 million to settle SEC and DOJ claims that it authorized improper payments of $1.25 million to a third-party intermediary retained to assist the company in resolving customs disputes in Nigeria. In April 2013, the SEC said the company did so despite former senior executives knowing that the agent intended to use the funds to “entertain” Nigerian officials.

It is not possible for a company to completely eliminate all risk of illegal payments, especially when it has far-flung operations around the world. But with the risk posed by anti-corruption laws constantly rising, companies will be well served to give a fresh look to the FCPA policies to see if they are keeping up with U.S. Government expectations and industry best practices. Putting in place strong internal controls related to gifts, meals, entertainment and travel, backed up by training and compliance audits is one effective way to manage the risk posed by anti-corruption laws and to help ensure that the kinds of penalties outlined here are kept at bay.