- FCPA Professor - http://fcpaprofessor.com -

A Brazilian Telecom Company Hosted Brazilian Government Officials For Soccer Tournaments In Brazil – Five Years Later, U.S. Collects $4.1 Million In FCPA Enforcement Action

It is only fitting that one day after publishing this post [1] regarding the SEC’s inconsistent enforcement of the Foreign Corrupt Practices Act (and how the SEC resolved an FCPA books and records and internal controls case for $0 against a U.S. company for engaging in accounting misconduct including the CEO of the company making misrepresentations to the market concerning $307 million) that the SEC brings this $4.1 million administrative action [2] against Telefonica Brasil (a company with ADRs traded on the NYSE).

The conduct at issue?

You better sit down for this … the company “failed to devise and maintain sufficient internal accounting controls over a hospitality program that the company hosted in connection with the 2014 World Cup and 2013 Confederations Cup” both held in Brazil.

In summary fashion, the order finds:

“Telefônica Brasil failed to devise and maintain sufficient internal accounting controls over a hospitality program that the company hosted in connection with the 2014 World Cup and 2013 Confederations Cup. In the context of this program, Telefônica Brasil offered and provided tickets and hospitality to government officials who were directly involved with, or in a position to influence, legislative actions, regulatory approvals, and business dealings involving the company. In total, Telefônica Brasil provided World Cup tickets and related hospitality to approximately 93 government officials and Confederations Cup tickets and related hospitality to approximately 34 government officials.

The payments for the tickets were not accurately reflected in Telefônica Brasil’s books and records, and the company failed to devise and maintain a sufficient system of internal accounting controls. This conduct arose in an environment in which the company failed to adequately enforce its corporate antibribery and anticorruption policies.

As a result, Telefônica Brasil violated [the FCPA’s books and records and internal controls provisions].”

Under the heading Telefonica Brasil’s World Cup Ticket Program, the order states:

“In March 2012, the opportunity arose for Telefônica Brasil to purchase tickets for the World Cup that would take place in Brazil in June and July 2014. Telefônica Brasil agreed to purchase 1860 World Cup tickets from a FIFA vendor, for a total of approximately $5.1 million, to be paid in three installments in 2012, 2013, and 2014. An internal memorandum by Telefônica Brasil’s Marketing Director dated May 23, 2012, which sought approval for the purchase of the tickets, described the purchase as being “for relationship-building activities with strategic audiences.” An executive expense committee at Telefônica Brasil, comprising of senior leadership at the company, approved the general purchase of the tickets. The paperwork seeking internal approval to purchase these tickets included no mention of giving tickets to government officials. However, it was known within the company that some of the tickets would be given to government officials.

Telefônica Brasil purchased the World Cup tickets and intended to pay for related hospitality at an average cost per guest of approximately $3,204, of which $2,750 comprised the cost of the tickets. The company allocated these tickets to its various departments, including approximately 10 percent of the tickets to the Institutional Relations Department (“IR Department”), which interacted with the Brazilian government and foreign governments. Telefônica Brasil, primarily through the IR Department, gave a total of 194 World Cup tickets to 93 government officials (in some cases, more than one ticket was given to an official so that he or she could invite friends or family members). The total value of tickets and related hospitality given to these government officials amounted to $621,576.

Most of the tickets given to government officials were given to individuals who were significant to the company’s business interests, including federal congressmen and senators, mayors, and other government officials. A small number of personnel from foreign embassies who were commercial customers of Telefônica Brasil, including one ambassador, also received tickets. In selecting ticket recipients, management looked at the possible benefit to the company and at opportunities to build relationships with important officials. In an internal IR Department email dated May 27, 2014, an IR Manager noted that in creating the lists of suggested guests, he took “into account the importance of the actions that each guest has already effectively done in our favor.” The employee then suggested that certain government officials be given tickets and outlined their roles in the Brazilian government. Among other examples, in a June 4, 2014 email, an IR employee requested from an IR Manager a ticket for a federal legislator’s chief of staff who “has opened many doors for us” and noted that there was further legislative activity “going through the House and I will need his help.” Other June 2014 emails reflect that a free trade tax zone official responsible for providing customs clearances was given a ticket and asked for his “ongoing support” in receiving a customs clearance for a particular invoice. A July 2014 email between IR Department employees suggested inviting two Brazilian mayors but only if, during the telephone calls inviting them, the IT Department could raise with them certain “legislative amendments” of importance to the company.”

[3]

Under the heading Telefonica Brasil’s Confederations Cup Ticket Program, the order states:

“In 2013, the year before the World Cup, Telefônica Brasil also purchased Confederations Cup tickets and related hospitality for invited guests. The Confederations Cup is a major soccer tournament that precedes the World Cup by one year and takes place in the same country that is hosting the World Cup.

In March and April 2013, Telefônica Brasil paid a FIFA vendor $428,219 for 240 tickets for the Confederations Cup which amounted to an average cost per ticket of approximately $1,784. Telefônica Brasil also paid $312,226 for hospitality related to the Confederations Cup. Taking both the cost of the tickets and hospitality into account, the average cost per guest for the Confederations Cup amounted to approximately $3,085. As with the World Cup, the company allocated these tickets to its various departments, including approximately 15 percent to the IR Department.

Telefônica Brasil, primarily through the IR Department, gave a total of 38 Confederations Cup tickets to 34 government officials. The total value of tickets and related hospitality given to these government officials amounted to $117,230. Confederations Cup tickets were given to government officials who were significant to the company’s business interests, including federal congressmen and various government ministry officials.”

Under the heading Telefonica Brasil Lacked Internal Accounting Controls, the order states:

“As with its parent company, Telefônica Brasil had a general code of ethics that explicitly prohibited offering or accepting gifts, hospitality, or other types of incentives “which may reward or influence a business decision,” as well as a policy that donations would not be made if linked with political activity.

However, Telefônica Brasil lacked internal accounting controls sufficient to implement or maintain these policies and prevent giving things of value, like World Cup tickets, to government officials where such gifts might influence or reward an official decision. As a result, with the approval of senior managers, the company ended up offering such tickets and hospitality to government officials who were directly involved with, or in a position to influence, regulatory matters, legislation, and other business efforts of benefit to Telefônica Brasil.

In implementing internal accounting controls over gifts, Telefônica Brasil management focused on company employees accepting tickets and hospitality, as opposed to the company offering tickets and hospitality to others, including government officials. Although the broad policy prohibition was clear, and certain individuals inquired about its applicability, it was not followed due to the lack of internal accounting controls, a compliance breakdown, and a deficient internal audit function.”

Under the heading Telefonica Brasil Improperly Accounted for its Purchase of World Cup and Confederations Cup Tickets and Related Hospitality for Government Officials, the order states:

“The total cost for the World Cup ticket purchase was approximately $5.1 million and was paid in three installments in 2012, 2013, and 2014. Telefônica Brasil booked the first two installment payments for the World Cup tickets as “Publicity Institutional Events” and the third installment payment as “Advertising & Publicity” (the third payment was not also booked as “Publicity Institutional Events” because of a change in accounting codes at the company). It booked the hospitality provided for the World Cup as “Advertising & Publicity.”

The total cost for the Confederations Cup ticket purchase was approximately $428,000 and was paid in two installments in 2013. Telefônica Brasil booked the two installment payments for the Confederations Cup tickets as “Publicity Institutional Events” and booked the hospitality provided for the event as “Advertising & Publicity.”

Telefônica Brasil failed to properly characterize the purchase of tickets and related hospitality that were given to government officials. It recorded the purchases and hospitality as being for general advertising and publicity purposes when in fact those tickets and related hospitality were given to government officials. As such, Telefônica Brasil’s books and records did not, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the company’s assets.”

Based on the above findings, the SEC found that Telefonica Brasil violated the FCPA’s books and records provisions “by improperly recording the purchase of tickets and hospitality that were given to government officials” and internal controls provisions “by failing to devise and maintain sufficient internal accounting controls to detect and prevent the making of improper payments to foreign officials.”

Under the heading Telefonica Brasil’s Remedial Efforts and Cooperation, the order states:

“In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Respondent and cooperation afforded the Commission staff. Telefonica Brasil’s remediation included enhancing its internal accounting controls and compliance functions, and adopting a new anti-corruption policy and compliance structure. Telefônica Brasil’s cooperation included timely sharing of facts developed during the course of an internal investigation by its board and voluntarily producing and translating documents.

As noted in this SEC release [4]:

“Without admitting or denying the findings, Telefônica agreed to a cease-and-desist order and to pay a $4,125,000 civil money penalty.  In determining to accept the offer, the SEC considered Telefônica’s cooperation and remedial acts.”

This is not the first time the SEC has dinged a foreign company in connection with hosting foreign officials at a sporting event. (See here [5] for the $25 million 2015 FCPA enforcement action against BHP Billiton in connection with its sponsorship of the 2008 Summer Olympics in Beijing.

Elevate Your FCPA Research

There are several subject matter tags in this post. However, only subscribers to FCPA Professor's premium search feature can see and use them in research. Efficient and cost-effective FCPA research is just a click away.

Elevate Your Research [6]