This previous post  went in-depth into the recent $4.1 million FCPA enforcement action against Telefonica Brasil and this post continues the analysis by highlighting additional issues to consider.
What Is The U.S. Interest?
According to the SEC, Telefonica Brasil (a subsidiary of Spanish multinational Telefonica S.A. and the largest telecom company in Brazil with 34,000 employees and $14 billion in revenue) purchased 1,860 World Cup tickets for a total of approximately $5.1 million “for relationship-building activities with strategic audiences.”
The company allocated these tickets to 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.” The company, 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) and the total value of tickets and related hospitality given to these government officials amounted to $621,576.
In addition, Telefonica Brasil purchased 240 Confederations Cup tickets for a total of approximately $428,219 and allocated approximately 15 percent of these tickets to the IR Department who gave a total of 38 tickets to 34 government officials.
The enforcement action finds absolutely no U.S. nexus other than that Telefonica’s Brasil’s ADRs are registered with the SEC and traded on New York Stock Exchange. Thus, based on the above core conduct the U.S. government secures a $4.1 million settlement.
In this yet another example where the U.S. should back away from an FCPA enforcement against a company from a fellow OECD Convention country? If Telefonica Brasil engaged in objectionable conduct perhaps Brazilian authorities are best-suited to bring an enforcement action.
In this February 26, 2016 SEC filing , the company disclosed:
“As of the date of this report, Telefónica is currently conducting an internal investigation regarding possible violations of applicable anti-corruption laws. Telefónica has been in contact with governmental authorities about this matter and intends to cooperate with those authorities as the investigation continues. It is not possible at this time to predict the scope or duration of this matter or its likely outcome.”
Thus from start to finish, the company’s scrutiny appears to have lasted approximately 3.5 years. This is a long time period for a relatively narrow and discrete issue particularly since the company – in the words of the SEC – cooperated including “timely sharing of facts developed during the course of an internal investigation by its board and voluntarily producing and translating documents.”
Am I the only one who often wonders (when seeing U.S. politicians in suites at major sporting events) how these individuals ended up in the suites and partaking in the hospitality associated with the suites?
For more on this general dynamic, see this article  titled “The Uncomfortable Truths and Double Standards of Bribery Enforcement.”
Were These Really Improper Recordings?
According to the SEC, Telefonica Brasil booked the soccer tickets as “Publicity Institutional Events” or “Advertising & Publicity” and the associated hospitality as “Adversity & Publicity.”
Were these bookings truly in violation of the FCPA’s books and records provisions which require that issuers “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer”?
After all, the FCPA defines “reasonable detail” to “mean such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.”
According to the SEC, yes these were improper recordings because the company “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.”
Invoking A Standard That Does Not Even Exist in the FCPA
To anyone who values the rule of law, it is troubling when an FCPA enforcement agency invokes a standard of liability that does not even exist under the FCPA.
Yet once again, that is what the SEC did in the Telefonica Brasil enforcement action.
According to the SEC, the company had “general code of ethics that explicitly prohibited offered or accepting gifts, hospitality, or other types of incentives ‘which may reward or influence a business decision’ as well as policy that donations would not be made if linked to political activity.” Yet, according to the SEC, the company “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”
Elsewhere, the SEC stated that Telefonica Brasil violated the internal control provisions “by failing to devise and maintain sufficient internal accounting controls to detect and prevent the making of improper payments to foreign officials.”
Problem is, the invoked “detect and prevent” standard does not even exist in the FCPA!
Rather, the FCPA’s internal controls provisions state that an issuer shall “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that” certain financial objectives are met.
The FCPA then defines “reasonable assurances” to “mean such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.”
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