New Brazilian Legislation Addresses Bribery By Corporate Entities
Today’s post is from FCPA Professor’s Brazil Expert Gregory Paw (Pepper Hamilton) and Fabiola Emilin Rodrigues (Demarest Advogados)
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New Brazilian Legislation Addresses Bribery By Corporate Entities
The millions of Brazilians protesting in recent weeks in cities and towns across Brazil have brought important and far-reaching corruption reform to one of the world’s largest economies. The implications for companies operating in Brazil will come fast, and will include incentives to operate an effective compliance program and establish a control environment that will detect potential wrongdoing inside a corporation.
Protests Highlight Corruption Concerns and Need for Reform
Protesters initially cited a bus fare increase as the motive for their ire. Yet as days passed, the root causes of the crowd’s anger turned to broader social issues such as economic fairness and the quality of civil services like health, education and transportation. Corruption and the mismanagement that protesters say blights Brazil and its political system became a focal point. Even as Brazil’s national football team struck a major win over defending World Cup champion Spain, cheers in the historic Maracanã Stadium were met with equally strong shouts outside the stadium walls calling for political reform.
The protesters supported the demands for reform by citing recent history, including last year’s trial of an elaborate vote-buying scheme that allegedly included congressmen, judges and a high-level advisor to the former president yet resulted, in the eyes of skeptical protesters, in little tangible punishment or political reform. Instead of change, protesters pointed to the fact that almost a third of Brazil’s Congress is facing charges in trials overseen by the Supreme Federal Tribunal, according to a prominent watchdog group.
As protests spread and grew, political leaders of all suits suffered swift declines in popularity and scrambled to find measures to meet the public demands. Municipal officials rolled back transit fare increases, and President Dilma Rousseff pledged additional investments in public transit projects. Congressional leaders began to move legislation that had languished for years to earmark oil royalties to education and public healthcare.
Corruption also became a key reform point. As initial measures, Brazil’s Senate approved a bill establishing stiffer sentencing for certain corruption convictions, and the congressional lower house rejected a constitutional amendment intended to limit investigations into legislative corruption. In the midst of this activity, the Supreme Federal Tribunal ordered the arrest of a lower house deputy convicted on corruption charges three years ago, marking the first time under Brazil’s modern constitution that the court ordered the arrest of a sitting congressman.
The Clean Companies Act
In Brazil, criminal liability is personal. With the exception of environmental crimes, corporations face only civil and administrative liability under a complex maze of regulations. After entering international treaties concerning corporate liability for crimes, Brazil has struggled for several years to pass legislation holding companies accountable for acts of corruption. Legislation introduced in 2010 went through study and several hearings, yet numerous attempts to bring the bill to vote failed.
This April, a bill establishing civil and administrative corporate liability finally passed the lower house of Congress. The bill appeared to languish until July 4, 2013, when the Senate took up and passed the legislation. The new law goes to President Rousseff for approval, and will come into force 180 days after it is published in the official gazette. The law is expected to take force in early 2014.
The bill addressing corruption by legal entities will complement existing laws in the Brazilian Criminal Code addressing bribery by individuals, which apply where criminal intent can be demonstrated that a person offered or promised any benefit to public employees that relates to an express or implied request or suggestion that the public employee perform or refrain from performing, or delay any act within the scope of his duties. Thus, if the new bill becomes law, individuals will face criminal liability and legal entities will face civil and administrative sanctions for bribery.
Foreign and Domestic Corporate Liability
The new law establishes strict liability for Brazilian legal entities, as well as foreign legal entities with a “registered office, branch or representation in the Brazilian territory.” The law prohibits bribery of public officials relating to local and foreign public administration. Specifically, the law establishes civil and administrative liability for corporate entities that “promise, offer or give, directly or indirectly, an undue advantage to a public agent, or third person related to him.” The law also prohibits bid rigging and other frauds in the public procurement process, as well as efforts to hinder investigations or audits by public agencies.
Sanctions for offenses, which the Organisation for Economic Co-operation and Development directed should be “effective, proportionate and dissuasive,” can range from one percent to 20 percent of the entity’s gross revenue from the prior year or R$ 6,000 (about US$3,000) to R$ 60 million (about US$30 million) if the revenue is too difficult to calculate. Firms found liable can be dissolved or suspended, or face forfeiture, debarment, loss of public contracts and prohibition on incentives and public financing. Offending firms can find information about the nature of the misconduct published in newspapers, providing a powerful incentive against misconduct.
Voluntary Disclosure and Cooperation
The bill encourages the cooperation of firms under investigation , including by voluntary reporting to the authorities, before the initiation of a proceeding, as well as the disclosure of information during the course of the investigations. The bill also provides a leniency program for companies that first disclose wrongdoing and cease involvement in the unlawful practice. Fines can be reduced by up to 2/3 under the leniency program, and other sanctions may also be relieved.
Compliance Programs
Critically, the bill provides that a legal entity that has an effective compliance program in place will get credit for this effort. Specifically, “the existence of mechanisms and internal integrity procedures, audit and incentive denunciation of irregularities in applying the code of conduct and ethics within the legal entity” will be considered when applying any sanction, with criteria to be set by the federal government. The extent of credit is not yet known, but this incentive is similar to efforts by regulators in the United States and United Kingdom to encourage responsible corporate citizenship.
One of the bill’s lower house sponsors, Mr. Carlos Zarattini (PT-SP), emphasized that the legislation is important not only for its punitive aspect but also because it encourages companies to adopt good administrative practices in order to avoid infringing the laws, and also to correct errors through leniency agreements. “Now we not only have established a way to punish as induce companies to a correct practice,” Mr. Zarattini explained. Another sponsor, Mr. John Arruda (PMDB-PR), summarized that “[f]rom this law we are creating goals for that in Brazil to establish a culture of best practice in the private sector.”
Addressing Risk under the Clean Companies Act
Companies operating in Brazil will have a strong incentive to establish and strengthen compliance efforts when the Clean Companies Act takes effect. Establishing and operating compliance programs – and building off of international standards of compliance that have developed under other major anti-corruption laws — will be the best line of defense under the new law. The law’s effectiveness will depend in large part on how the Brazilian business community embraces the concepts of effective compliance. This “essential engine” in the fight against corruption, as Senate President Renan Calheiros observed, carries a number of benefits to Brazil, including generating renewed interest in Brazilian investments by multi-national companies that will appreciate the greater transparency and legal certainty afforded by the new law.
An FCPA Lawyer In Paris
Today’s post is a Q&A with Bryan Sillaman (Hughes Hubbard & Reed). Sillaman is a member of the firm’s Anti-Corruption and Internal Investigations Practice Group and is currently working in the firm’s Paris office. Prior to joining Hughes Hubbard, Sillaman was an attorney in the SEC Enforcement Division where he conducted several Foreign Corrupt Practices Act investigations.
Q: What brought you to Paris and what is it like being an FCPA lawyer in Paris?
Hughes Hubbard has had an office in Paris for nearly 50 years, and has a long history representing French companies. I was fortunate enough to be asked to come to Paris to assist one of our French clients with a global anti-corruption review. At the time, it was unclear how long I would stay, but that was nearly four and a half years ago. It has been fascinating and instructive to see how the FCPA and U.S. enforcement environment is perceived within Europe, and to also witness the development of other significant international anti-corruption initiatives, such as the passage of the U.K. Bribery Act, which got the attention of a lot of European companies. The industry of compliance appears to be steadily growing in France, with one of the French universities creating a Masters in Law in Business Ethics (Master Droit & Ethique des Affairs). While part of this seems to be in response to increased enforcement of European companies by the U.S., I also believe that the political climate in Europe generally, and France specifically, is becoming less tolerant of corruption – particularly at the governmental level – which has helped fuel the industry.
Q: How are European clients different from U.S. clients, perhaps in terms of voluntary disclosure, cooperation with enforcement agencies, etc.?
One thing to keep in mind when working with European companies is that, at least in certain countries, it was legal and in fact tax deductible to pay bribes until just over a decade ago. In this sense, anti-corruption compliance is a newer issue for many companies, although it is one that is gaining increased focus and attention, particularly within multinational corporations. It should also be remembered that for the first approximately twenty years of the FCPA’s existence, it was relatively rarely enforced. Thus, while perhaps some European countries are lagging the U.S. in bringing their own enforcement proceedings, there does appear to be an increased focus on the issue within the corporate community.
For better or worse, European conceptions of topics such as voluntary disclosure, cooperation, and remediation have been largely shaped to date by U.S. enforcement jurisprudence and posture. Therefore, in advising European companies on such issues, counsel naturally have differing philosophical viewpoints on the potential benefits and pitfalls of voluntary disclosure or cooperation. Anecdotally, however, I think that the concept of voluntary disclosing issues to the government (and potentially being prosecuted in return) strikes many European companies as contrary to sound logic. European clients also find fascinating the broad jurisdictional view taken by U.S. (and now U.K) regulators, as well as what until recent history is a new concept: that of the independent corporate monitor.
There are also more nuanced issues that can have a profound impact on how to conduct a compliance review with European companies that may, at first blush, seem unusual to U.S. counsel. For example, one of the initial differences that will likely become apparent is how European companies approach data privacy rights of employees and the handling or movement of potentially sensitive information. Europe in general, and certain countries like France in particular, have much stronger personal privacy data rights than those we may be familiar with in the United States, and these rights extend into an individual’s workplace. Counsel who are not wary of these issues and take them in consideration in structuring and conducting a review can face their own legal trouble. In addition to bestowing legal rights on individuals, these data privacy concerns must also be taken into account culturally, in the sense that counsel should be prepared for greater resistance to activities such as the collection of emails and electronic data that may be necessary, but nonetheless intrusive, steps towards conducting an effective review.
Q: You have travelled extensively as part of your FCPA practice (Angola, Brazil, China, Indonesia, Malaysia, the Middle East, Nigeria, Thailand and Venezuela). From these travels and experiences, what do you believe are the major root causes of FCPA violations?
Corruption is most certainly a two-way street. When it comes to bribe payers, unfortunately many cases seem to boil down to greed and a myopic focus on winning at all costs that is ever-too-present in many industries. For sure there are frequently claims that “everyone else is doing it,” but as we all learned when we were young, that doesn’t make it right. In terms of bribe recipients, while I will not claim to have researched the issue as much as others have in this field, anecdotally one of the major themes in countries we often visit is the absence of a fair and livable wage for government functionaries. In these cases, officials may feel as though there is no alternative but to seek payments from companies and their employees (who they may see living at a much higher standard) in order to earn a sufficient living. With larger-scale corruption, I think the same mentality exists, but in a more perverse way – officials placed in charge of vast amounts of resources see companies and others making significant amounts of money off of those resources and see no alternative but to seek what they come to view as their rightful piece of the pie.
Q: What do you know or realize now as it relates to the FCPA and FCPA compliance that you did not know or realize while at the SEC working on FCPA cases?
Perhaps it was more a function that I was at the SEC very early in my career, but I did not realize until traveling extensively assisting clients in this area the importance that companies place on practical guidance when it comes to anti-corruption compliance. It is one thing to recite to a client the FCPA’s statutory language, but quite another to provide helpful guidance on ways in which companies can operate in a legal and compliant way in very difficult locations and business environments. I and my colleagues operate from the premise that most people want to do the right thing, they just need the training and guidance to do so. I think this thirst for practical guidance is one of the reasons that DOJ/SEC Resource Guide to the U.S. Foreign Corrupt Practices Act has been well received within this community, and I applaud both agencies for the significant efforts that went into making it approachable and practical. Certainly, there remain very difficult questions, some of which do not have a clear answer. For example, when and to what extent is it appropriate to take personnel action against an employee? There may not be a black-and-white answer to this question, and in Europe, where labor laws tend to heavily favor employees, implementing appropriate employee sanctions can be quite difficult. Having been fortunate enough to have helped companies navigate through some of these issues, I acknowledge that I lacked a full appreciation earlier in my career for the time and energy that companies and their compliance personnel devote to implementing, in a practical way, the anti-corruption legal standards and guidance that govern their activity.
What Is A Board’s Responsibility For Compliance?
A guest post today from Thomas Fox who runs the FCPA Compliance and Ethics Blog.
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“The nightmare of every corporate director is to wake up to find out that the company of the Board he or she sits on is on the front page of the New York Times (NYT) for alleged illegal conduct. This nightmare came true for the Directors of Wal-Mart when the New York Times, in an article entitled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle”, alleged that Wal-Mart’s Mexican subsidiary had engaged in bribery of Mexican governmental officials and that the corporate headquarters in Bentonville, Arkansas, had covered up any investigations into these allegations.
Recently the NYT reported that shareholders were asking questions of the Wal-Mart Board regarding its response these allegations. In a story, entitled “More Dissent in a Store Over Wal-Mart Bribery Scandal”, Stephanie Clifford reported Wal-Mart shareholders are still asking questions of the Board regarding its role in the ongoing scandal. Some of these questions include “whether the company is holding current and former executives financially responsible for breaching company policies” and concerns about the company’s supply chain vendors. This shareholder dissatisfaction led several groups of large shareholders to indicate that they would vote against the company’s current Board of Directors at its annual shareholder meeting.
Clifford quoted from a report by Institutional Shareholder Services (ISS), a proxy advising firm, which said that investors have also complained about “being in the dark about the nature and extent of the alleged violations (and knowledge of them within the company)” and the company’s “timetable for completion of its investigation and disclosure of its results.” There were also questions raised about the remediation efforts of Wal-Mart. The ISS report went on to add that “Shareholders should vote against these directors to send a clear message to the board that such poor oversight does not come without repercussions.”
The publicity and costs to Wal-Mart have been well documented. On his FCPA Professor website, Professor Koehler has consistently stated that he views this scandal as largely a failure of corporate governance. In a post entitled, “Wal-Mart One Year Later” he said, “corporate governance, or lack thereof, is what made the NY Times April 2012 remarkable. This is the reason why Wal-Mart generated all the buzz it did a year ago this week and I’ve consistently held the view that the Wal-Mart story is a corporate governance sandwich with the FCPA as a mere condiment.” I thought about Professor Koehler’s observations on this failure in light of Clifford’s article and wondered what the Board’s legal obligations might be.
I. Some Case Law
As to the specific role of ‘Best Practices’ in the area of general compliance and ethics, one can look to Delaware corporate law for guidance. The case of In Re Caremark International Inc. Derivative Litigation 698 A.2d 959 (Del.1996) was the first case to hold that a Board’s obligation “includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards.” The Corporate Compliance Blog, in a post entitled “Caremark 101”, said that the Caremark case “addressed the board’s duty to oversee a corporation’s legal compliance efforts. As part of its duty to monitor, the Board must make good faith efforts to ensure that a corporation has adequate reporting and information systems. The opinion described this claim as “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” with liability attaching only for “a sustained or systematic failure to exercise oversight” or “[a]n utter failure to attempt to ensure a reporting and information system.”
In the case of Stone v. Ritter 911 A.2d 362, 370 (Del. 2006), the Supreme Court of Delaware expanded on the Caremark decision by establishing two important principles. First, the Court held that the Caremark standard is the appropriate standard for director duties with respect to corporate compliance issues. Second, the Court found that there is no duty of good faith that forms a basis, independent of the duties of care and loyalty, for director liability. Rather, Stone v. Ritter holds that the question of director liability turns on whether there is a “sustained or systematic failure of the board to exercise oversight – such as an utter failure to attempt to assure a reasonable information and reporting system exists.”
Andrew J. Demetriou and Jessica T. Olmon, writing in the ABA Health Esource blog, said that “This standard aims to protect shareholders by ensuring that corporations will adopt reasonable programs to deter, detect and address violations of law and corporate policy, while absolving the Board from liability for corporate conduct so long as it has exercised reasonable responsibility with respect to the adoption and maintenance of a compliance and reporting system. Although the standard protects the Board, consistent with most jurisprudence under the business judgment rule, it also requires that the Board follow through to address problems of which it has notice and this may include adopting modifications to its compliance program to address emerging risks.”
Lastly, I recently heard Jeff Kaplan discuss the oversight obligations of the Board regarding the compliance function. In addition to the above cases, he discussed the case of Louisiana Municipal Police Employees’ Retirement System et al. v. David Pyott, et al., 2012 WL 2087205 (Del. Ch. June 11, 2012) (rev’d on other grounds, No. 380, 2012, 2013 WL 1364695 (Del. Apr. 4, 2013), which was a shareholder action that went forward against a Board based upon a claim that the Board knew of compliance risk based on the company’s business plan. The Delaware Court pointed out the possibility that “the appearance of formal compliance cloaked the reality of noncompliance, and directors who understood the difference between legal off-label sales and illegal off-label marketing continued to approve and oversee business plans that depended on illegal activity.” Kaplan believes that this case more generally, supports the need for risk-based oversight by a Board.
II. FCPA Guidance and US Sentencing Guidelines
A Board’s duty under the Foreign Corrupt Practices Act (FCPA) is well-known. In the Department of Justice / Securities and Exchange Commission FCPA Guidance, under the Ten Hallmarks of an Effective Compliance Program, there are two specific references to the obligations of a Board.
The first in Hallmark No. 1, entitled “Commitment from Senior Management and a Clearly Articulated Policy Against Corruption”, states “within a business organization, compliance begins with the board of directors and senior executives setting the proper tone for the rest of the company.”
The second is found under Hallmark No. 3 entitled “Oversight, Autonomy and Resources”, where it discusses that the Chief Compliance Officer (CCO) should have “direct access to an organization’s governing authority, such as the board of directors and committees of the board of directors (e.g., the audit committee).”
Further, under the US Sentencing Guidelines, the Board must exercise reasonable oversight on the effectiveness of a company’s compliance program. The DOJ’s Prosecution Standards posed the following queries: (1) Do the Directors exercise independent review of a company’s compliance program? and (2) Are Directors provided information sufficient to enable the exercise of independent judgment?
Board failure to head this warning can lead to serious consequences. David Stuart, a senior attorney with Cravath, Swaine & Moore LLP, noted that FCPA compliance issues can lead to personal liability for directors, as both the SEC and DOJ have been “very vocal about their interest in identifying the highest-level individuals within the organization who are responsible for the tone, culture, or weak internal controls that may contribute to, or at least fail to prevent, bribery and corruption”. He added that based upon the SEC’s enforcement action against two senior executives at Nature’s Sunshine Products, “under certain circumstances, I could see the SEC invoking the same provisions against audit committee members—for instance, for failing to oversee implementation of a compliance program to mitigate risk of bribery”. It would not be a far next step for the SEC to invoke the same provisions against audit committee members who do not actively exercise oversight of an ongoing compliance program.
There is one other issue regarding the Board and risk management, including FCPA risk management, which should be noted. It appears that the SEC desires Boards to take a more active role in overseeing the management of risk within a company. The SEC has promulgated Regulation SK 407 under which each company must make a disclosure regarding the Board’s role in risk oversight which “may enable investors to better evaluate whether the board is exercising appropriate oversight of risk.” If this disclosure is not made, it could be a securities law violation and subject the company, which fails to make it, to fines, penalties or profit disgorgement.
From the Delaware cases, I believe that a Board must not only have a corporate compliance program in place but actively oversee that function. Further, if a company’s business plan includes a high-risk proposition, there should be additional oversight. In other words, there is an affirmative duty to ask the tough questions. The specific obligations set out regarding the FCPA drive home these general legal obligations down to the specific level of the statute.
The Wal-Mart case has driven home the need for focused Board of Directors oversight of a company’s compliance program. But it is more than simply having a compliance program in place. The Board must exercise appropriate oversight of the compliance program and indeed the compliance function. The Board needs to ask the hard questions and be fully informed of the company’s overall compliance strategy going forward. If the Wal-Mart Board had fulfilled its legal obligations regarding compliance, the company might not have found itself on the front page of the New York Times.”
On Being An FCPA Associate … A Q&A With Nathan Lankford
FCPA Professor enjoys a diverse group of readers, including law and other students interested in careers that focus on the Foreign Corrupt Practices Act.
To these readers and others, meet Nathan Lankford, a 2008 graduate of Georgetown University Law Center and a current associate at Miller & Chevalier in Washington, D.C. In the below Q&A, Lankford describes his FCPA experiences to date and provides advice to students interested in FCPA careers.
What was your first FCPA related assignment?
Well, it wasn’t very glamorous – I wrote an article for our FCPA Review on “Jack” Stanley’s settlement with the DOJ. On the bright side, it turned out that a few months later, this case was required reading for my first major assignment as the main Associate on the monitor team for KBR, a prominent engineering and construction company of which Stanley had been CEO. KBR settled with the DOJ and SEC for a long-running bribery scheme in Nigeria, and the settlement remains the biggest against a US company in FCPA history. That was my primary project for three years, and a lot of fun. I got to work with some of the greatest minds and personalities at my firm, met impressive people at all levels of KBR, and had a role in solving complex compliance issues. When it wrapped up, I felt like I’d earned a PhD in anti-corruption law.
What countries have you visited doing FCPA work?
Algeria, Cameroon, Equatorial Guinea, Nigeria, China, Indonesia, Israel, Qatar, Cyprus, Ireland, Kazakhstan, Poland, Argentina, Brazil, and Mexico.
Of those countries, what has been your most memorable experience?
Flying by helicopter to an Algerian facility. A close runner-up would be when Nigerian airport officers took my iPhone. In case you’re wondering, no bribes were paid, and they gave it back…eventually.
As you learned more about the FCPA, what surprised you the most?
The biggest surprise was discovering the countless ways corruption can happen. I still haven’t come across a situation where an official said “I can fix this problem for a bribe.” The pressures and requests are almost always subtle, and constantly taking new forms. I love hearing the stories of people working in challenging contexts because they often have more direct experience of such pressures – at work and in their personal lives – thanDC-based lawyers like myself.
If you could change one thing about the FCPA or FCPA enforcement, what would it be?
Like many other people, I’d like more official guidance on certain issues so companies can better focus on high-risk transactions. The DOJ’s/SEC’s recently issued Resource Guide to the FCPA is of course a very positive development in this regard, but I think it could have gone further to settle some debates that drain compliance resources, such as the proper way to identify “foreign officials” in the context of partially state-owned enterprises. More broadly, if I was asked what should be done to better fight corruption, I’d say I’d like to see more action by host countries on the demand side, with perhaps technical and other assistance from capital exporters like the US. Enforcement against companies can only do so much.
What advice do you have to students or young associates interested in having an FCPA practice?
I’d encourage anyone wanting to develop an FCPA practice to find ways to build credibility over time – specifically, with ordinary people you’ll be speaking with at companies, not just with other practitioners with specialized knowledge. Travel obviously helps– it’s good to be able to tell a skeptical interviewee in Malabo that you’ve visited EG several times before– as do language skills. It also helps to know the basics about the industries you serve, and how anti-corruption compliance fits into the bigger picture of corporate integrity, rule of law, and commercial realities. So I’d say that aside from developing the fundamental skills that all good lawyers need, students and young associates should take the time to travel and read widely, and stay practiced at talking with non-experts and non-lawyers.
Can We Make The Expenditure In The First Place? Practical Advice For Navigating Gift, Travel And Entertainment Issues
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.