The Greek ruler Draco has received some very bad PR advice over the centuries. After all, it is his name which is the root for our word draconian. Draco is credited with committing to writing the first Athenian Code of Laws. The laws of Athens previously had been passed along through oral tradition and administered in a quite arbitrary manner. Under Draco’s Code, the prior oral laws, which were known to a special class of aristocrats and were arbitrarily applied and interpreted, were recorded and made known to all literate citizens. The laws also distinguished between murder and involuntary homicide. As it was a codification of existing laws, they remained harsh, with death penalty remaining as the punishment for even minor offences. Today, Draco is remembered for the harshness of his Code, not his innovation in recording it.
I thought about Draco and his legacy when considering the events in China surrounding GlaxoSmithKline (GSK) over the past couple of weeks. Assuming your company does not want to use its travel budget to fund a multi-year, multi-million dollar bribery scheme and further assuming that your company wants to follow not only its own Code of Conduct pronouncement in addition to the strictures of the Foreign Corrupt Practices Act (FCPA); I thought it might be a good time to review how to provide travel and entertainment in compliance with this law. The Draco angle is that if you are intent in following anti-bribery laws such as the FCPA, the procedure is certainly not Draconian.
A. FCPA Guidance
The Department of Justice (DOJ)/Securities and Exchange Commission (SEC) Guidance clearly specifies that the FCPA does not ban gifts and entertainment. Indeed the Guidance specifies the following:
“A small gift or token of esteem or gratitude is often an appropriate way for business people to display respect for each other. Some hallmarks of appropriate gift-giving are when the gift is given openly and transparently, properly recorded in the giver’s books and records, provided only to reflect esteem or gratitude, and permitted under local law. Items of nominal value, such as cab fare, reasonable meals and entertainment expenses, or company promotional items, are 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.”
B. Opinion Releases
Prior to the FCPA Guidance, in 2007, the DOJ issued two FCPA Opinion Releases which offered guidance to companies considering whether, and if so how, to incur travel and lodging expenses for government officials. Both Opinion Releases laid out the specific representations made to the DOJ, which led to the Department approving the travel to the US by the foreign governmental officials. These facts provided strong guidance to any company which seeks to bring such governmental officials to the US for a legitimate business purpose. In Opinion Release 07-01, the Company was desired to cover the domestic expenses for a trip to the US for a six-person delegation of the government of an Asian country for an educational and promotional tour of one of the requestor’s US operations sites. In the Release the representations made to the DOJ were as follows:
- A legal opinion from an established US law firm, with offices in the foreign country, stating that the payment of expenses by the US Company for the travel of the foreign governmental representatives did not violate the laws of the country involved;
- The US Company did not select the foreign governmental officials who would come to the US for the training program;
- The delegates who came to the US did not have direct authority over the decisions relating to the US Company’s products or services;
- The US Company would not pay the expenses of anyone other than the selected official;
- The officials would not receive any entertainment, other than room and board from the US Company;
- All expenses incurred by the US Company would be accurately reflected in this Company’s books and records.
The response from the DOJ stated: “Based upon all of the facts and circumstances, as represented by the requestor, the Department does not presently intend to take any enforcement action with respect to the proposal described in this request. This is because, based on the requestor’s representations, consistent with the FCPA’s promotional expenses affirmative defense, the expenses contemplated are reasonable under the circumstances and directly relate to “the promotion, demonstration, or explanation of [the requestor's] products or services.””
In Opinion Release 07-02 the Company desired to pay certain domestic expenses for a trip within the US by approximately six junior to mid-level officials of a foreign government for an educational program at the Requestor’s US headquarters prior to the delegates attendance at an annual six-week long internship program for foreign insurance regulators sponsored by the National Association of Insurance Commissioners (NAIC). In the Release the representations made to the DOJ were as follows:
- The US Company would not pay the travel expenses or fees for participation in the NAIC program.
- The US Company had no “non-routine” business in front of the foreign governmental agency.
- The routine business it did have before the foreign governmental agency was guided by administrative rules with identified standards.
- The US Company would not select the delegates for the training program.
- The US Company would only host the delegates and not their families.
- The US Company would pay all costs incurred directly to the US service providers and only a modest daily minimum to the foreign governmental officials based upon a properly presented receipt.
- Any souvenirs presented would be of modest value, with the US Company’s logo.
- There would be one four-hour sightseeing trip in the city where the US Company is located.
- The total expenses of the trip are reasonable for such a trip and the training which would be provided at the home offices of the US Company.
As with Opinion Release 07-01, the DOJ ended this Opinion Release by stating, “Based upon all of the facts and circumstances, as represented by the Requestor, the Department does not presently intend to take any enforcement action with respect to the planned educational program and proposed payments described in this request. This is because, based on the Requestor’s representations, consistent with the FCPA’s promotional expenses affirmative defense, the expenses contemplated are reasonable under the circumstances and directly relate to “the promotion, demonstration, or explanation of [the Requestor's] products or services.” 15 U.S.C. § 78dd-2(c)(2)(A).”
C. Travel and Lodging for Governmental Officials
What can one glean from these 2007 Opinion Releases? Based upon them, it would seem that a US company can bring foreign officials into the US for legitimate business purposes. A key component is that the guidelines are clearly articulated in a Compliance Policy. Based upon these Releases the following should be incorporated into a Compliance Policy regarding travel and lodging:
- Any reimbursement for air fare will be for economy class.
- Do not select the particular officials who will travel. That decision will be made solely by the foreign government.
- Only host the designated officials and not their spouses or family members.
- Pay all costs directly to the service providers; in the event that an expense requires reimbursement, you may do so, up to a modest daily minimum (e.g., $35), upon presentation of a written receipt.
- Any souvenirs you provide the visiting officials should reflect the business and/or logo and would be of nominal value, e.g., shirts or tote bags.
- Apart from the expenses identified above, do not compensate the foreign government or the officials for their visit, do not fund, organize, or host any other entertainment, side trips, or leisure activities for the officials, or provide the officials with any stipend or spending money.
- The training costs and expenses will be only those necessary and reasonable to educate the visiting officials about the operation of your company.
Incorporation of these concepts into a compliance program is a good first step towards preventing any FCPA violations from arising, but it must be emphasized that they are only a first step. These guidelines must be coupled with active training of all personnel, not only on the Compliance Policy, but also on the corporate and individual consequences that may arise if the FCPA is violated regarding gifts and entertainment. Lastly, it is imperative that all such gifts and entertainment are properly recorded, as required by the books and records component of the FCPA.
The FCPA Guidance does specify some types of examples of improper travel and entertainment as follows:
- $12,000 birthday trip for a government decision maker from Mexico that included visits to wineries and dinners;
- $10,000 spent on dinners, drinks, and entertainment for a government official;
- A trip to Italy for eight Iraqi government officials that consisted primarily of sightseeing and included $1,000 in “pocket money” for each official;
- A trip to Paris for a government official and his wife that consisted primarily of touring activities via a chauffeur-driven vehicle.
The ongoing GSK investigation will no doubt provide additional lessons for the compliance practitioner. However, you can use the matter as a good reason to review not only your company’s procedures but to test it to determine if they are being followed or if there are issues which you might need to take a closer look at. When a Wal-Mart, News Corp or GSK is in the news for alleged FCPA violations, it provides you with a good reminder to review your compliance program.
This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at firstname.lastname@example.org.
© Thomas R. Fox, 2013