Today’s post is from Brian Chilton (DLA Piper LLP (US)).
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I first had the pleasure of meeting Professor Koehler in 2002, a time when, to paraphrase TRACE’s Alexandra Wrage, the legal world was still learning to spell F-C-P-A. Mike was a hard-working young associate already keenly (and presciently) interested in the statute’s nuances, and he was helping me wade through the bowels of a company’s documents detailing travel, meals, gifts and entertainment involving foreign officials after the company was “invited” to do so by the DOJ/SEC.
As the readers of Mike’s blog know all too well, FCPA awareness and enforcement has exploded since 2002, but one thing remains the same: gifts, meals, entertainment and travel remain the part of the statute that companies still find the most vexing in terms of day-to-day compliance. Rarely a day goes by that I don’t receive a call or email from a client with a question in this area.
The number and results of enforcement actions focusing exclusively on this area might lead a casual observer to conclude a gift/travel/entertainment mistake is unlikely to result in a serious penalty. But those practicing in the area know that a disproportionate number of enforcement matters ultimately resulting in a high penalty for bribes unrelated to gifts/meals/travel/
Advising companies to “keep a clean house” and accomplishing that are, of course, two entirely different matters. Companies, and particularly their business people on the front lines, understandably find the FCPA’s statutory language in this area quite frustrating, where the statutory language provides an affirmative defense to prosecution under the FCPA’s anti-bribery provisions if the thing of value otherwise given to the foreign official is (1) reasonable, (2) bona fide, and (3) directly related to the promotion, demonstration, or explanation of (4) the payer’s products or services. Congress purposefully left the key terms broad and undefined, providing a high degree of flexibility, but with a commensurate degree of uncertainty. Business people struggling with what’s lawful and what’s not feel like they’ve been given guidance that’s no more helpful than the famous admonition given by Justice Potter Stewart in the context of discerning nudity that loses the protection of the First Amendment: “I know it when I see it.”
The recent DOJ/SEC Guidance devotes all of one page (p.24) to the subject, helpfully pointing out, “Whether any particular payment is a bona fide expenditure necessarily requires a fact-specific analysis.” At the risk of vast understatement, the business community was hoping for more.
Nevertheless, the Guidance does offer “non-exhaustive list of safeguards, compiled from several DOJ Opinion releases that is better than nothing:
• Do not select the particular officials who will participate in the party’s proposed trip or program, or else select them based on pre-determined, merit based criteria;
• Pay all costs directly to travel and lodging vendors and/or reimburse costs only upon presentation of a receipt;
• Do not advance funds or pay for reimbursements in cash;
• Ensure that any stipends are reasonable approximations of costs likely to be incurred and/or that expenses are limited to those that are necessary and reasonable;
• Ensure the expenditures are transparent, both within the company and to the foreign government;
• Do not condition payment of expenses on any action by the foreign official;
• Obtain written confirmation that payment of the expenses is not contrary to local law;
• Provide no additional compensation, stipends, or spending money beyond what is necessary to pay for actual expenses incurred;
• Ensure that costs and expenses on behalf of the foreign officials will be accurately recorded in the company’s books and records.
Those are all good procedures to follow for planning meals/gifts/entertainment/
Compliance for promotional and marketing expenses should conceptually focus on three fundamental questions. The most important is to determine whether the expenditure is “bona fide” or “corrupt.” This requires that the business purpose of the expenditure be carefully defined. In other words, ask, “What products or services does the Company wish to promote, demonstrate, or explain?” As the DOJ/SEC Guidance alludes to, the more the item leans in the direction of “fun,” and away from “business,” the more likely it is to be perceived by DOJ/SEC as not bona fide.
On the “bona fide” question, it turns out that Justice Stewart’s formulation is not so bad after all. Anyone who has been around the business world long enough should have sufficient instincts to “know it when they see it” in terms of an expenditure that appears to be intended to ingratiate the company with the foreign official versus one that is hospitably polite, but not so nice as to overwhelm the business purpose. Here I like to advise my clients to apply what I call “The Spouse Eye-Roll Test.” We all have those business occasions where decorum requires us to include our spouse in an event, and, when we finally get around to inviting them, they react with the expected eye roll and an exasperated “Do I really have to go again this year?” You know your gift/meal/entertainment/travel has veered into the “too nice” realm if you can imagine your spouse, upon being given/invited to what you’re planning for the official, instead breaking into a big smile and saying, “Wow! That sounds great!”
The next step is to make sure that expenditures are directly related to the defined business purpose, rather than being only indirectly or tangentially related to the business purpose. In other words, ask, “Is the expenditure necessary to promote, demonstrate, or explain the product or service at the core of the defined business purpose?” The more the expenditure, both in terms of time and resources, is slanted in the direction of fun, so that the fun aspect begins to overwhelm the business aspect, the more likely it is that the expenditure is only indirectly promoting the Company’s goods and services. Similarly, expenditures related to “good will” or “team building” or “establishing the relationship” with foreign officials are almost always indirect rather than direct. Thus, the next time a marketing person says, “We need to give the gift/have the meal/pay for the trip to establish good will with this official,” your compliance radar should be going off BING BING BING BING BING.
The final question to ask is, “Is the amount of the expenditure reasonable?” The reasonableness of the expenditure is contextual fact specific, so that there are no broad general rules that can be defined in advance in order to ensure compliance. Nevertheless, appropriate areas to look in order to measure reasonableness include: (1) prevailing market rates for similar expenditures; (2) the amount of the expenditure versus the government official’s salary or receipt of similar benefits from his or her own government; (3) activity of the Company’s U.S.-regulated competitors when entertaining similar foreign government officials in a similar context; (4) custom both locally and within the particular industry; and (5) a company’s own reimbursement guidelines for its own people at a similar peer level to the official when traveling/eating on the company dime. Company reimbursement allowances tend to be highly frugal and business oriented so that using that as the expected baseline for expenditures involving government officials is a very good analytical starting point.
Finally, I do have one procedural “how” to add to the DOJ/SEC’s list that is probably the single best thing a company can do to avoid a violation in this area: BEGIN PLANNING EARLY. Given the statute’s breadth and flexibility in this area, if planning for a particular gift/meal/entertainment/travel expenditure begins early enough, and legal compliance is part of that early planning, an appropriate plan satisfying both the legal and business goals can almost always be constructed (the exception is those rare cases where the government official involved is truly and implacably corrupt).
Where most violations occur, despite a company’s otherwise good track record and intentions, is where the business person in Farawayistan plans the trip and calls the compliance counsel for approval only after the government official is already flying toward Company HQ while seated comfortably in First Class. When companies call me to review their plans, I usually have to tweak some minor aspect of the plan (“Well, maybe the side trip to Disney World is not such a great idea . . . .”), but so long as they consult me before invitations are issued and itineraries decided, I’ve never had to say, “No, you can’t do that.”
My thanks to the Professor for asking me to sit in for him while he and his family take a well-deserved vacation. I hope I’ve offered some additional practical advice in this area, though I know the readers are all looking forward to your return. Hook a few northern pike for us, Mike! (But make sure your fishing license is in order so that we don’t end up with an embarrassing incident involving things of value and government officials, especially if you stray too far north into those foreign, Canadian waters . . . . )
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Brian Chilton has been practicing in the area of anti-corruption, including as a former federal prosecutor, for over 20 years. His first novel in a three novel series, Issachar’s Heirs (White Feather Press, LLC), is due to be released around August 2013.
