FCPA Compliance and Ethics Blog

September 4, 2012

Travel and Entertainment Guidance from the DOJ

Yesterday I had a guest post by thebriberyact.com guys about some of the thoughts by David Green, the head of the UK Serious Fraud Office, on travel and entertainment under the Bribery Act. I had a comment along the lines that the statements by Green were nothing new in the way of guidance about what is required or allowed under the Bribery Act.  Based on this comment I thought it might be an appropriate time to review Department Of Justice (DOJ) Opinion Releases on travel and lodging expenses for government officials to discuss this area of a Foreign Corrupt Practices Act (FCPA) compliance program.

  1. Opinion Releases

In 2007, the DOJ issued two FCPA Opinion Releases which offered guidance to companies considering whether to, 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 Opinion Release 07-01 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 Opinion Release 07-02 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).

  1. Travel and Lodging for Governmental Officials

What can one glean from these two 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 Releases Opinions 07-01 and 07-02, 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.

It is always good to review the parameters of your compliance program. In addition to the wealth of commentary by compliance practitioners there is solid information from the DOJ in their Opinion Releases. Sometimes it is good to review these to make sure your company’s compliance program is following what the DOJ thinks is a best practices 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 tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

September 3, 2012

Doomsayers Proven Wrong Yet Again-Gifts and Entertainment Under the Bribery Act

Ed. Note-the following article was posted by our colleagues thebriberyact.com guys, Barry Vitou and Richard Kovalevsky Q.C. We received permission to repost the article in its entirety. 

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‘We are not interested in that sort of case. We are interested in hearing that a large company has mysteriously come second in bidding for a big contract. The sort of bribery we would be investigating would not be tickets to Wimbledon or bottles of champagne. We are not the “serious champagne office”.’

today’s Daily Mail quotes the Director of the Serious Fraud Office as saying.  It is helpful stuff.

We have said time and time again that the SFO is unlikely to be bringing a stand alone Bribery Act prosecution over corporate hospitality.  Scare stories published about Olympic corporate hospitality levels and pictures of empty seats led to reports that the Bribery Act was to blame.

Many of the empty seats were not in fact empty corporate boxes but instead seats belonging to Olympic officials who did not bother to turn up to early qualifiers. But why let the facts get in the way of a good story.

That said, we are aware of instances where corporates had Olympic corporate hospitality rejected because of the Bribery Act.

Hopefully the latest comments from the new SFO Director will kill off some of the scaremongering that has gone before among the media and some legal advisers.

In an excellent post our friend Howard Sklar recently exposed some legal advice given by one lawyer about the Bribery Act who advised:

“The limit should be zero dollars. That will keep you safe”

B******s.

Howard, known for his tempered approach commented:

“Really?  Zero?

Let’s just talk about how advice likes this harms not just the giver, but the receiver too.  First, the giver.  The person who gives this advice will give it to one of two types of people: people who know what they’re talking about, or people who don’t.  I don’t know which comes out on the bottom.  If the lawyer is giving this advice to a knowledgeable person, that person will likely politely smile, nod, and then put the lawyer in the “idiot” box in his head, and not listen to another thing that lawyer says.  Which is a problem, because maybe in the future—even a stopped clock is right, twice a day—that lawyer will give some advice the client should listen to.  But getting out of the “idiot” box is a rare feat.

Or the recipient won’t know what they’re talking about.  In which case, like a wide-eyed doe, they’ll just accept what the lawyer says as a best practice.  Heaven forbid they go back to their own company and repeat that advice out loud.  (We’re back to the “Idiot” box).  Or even worse, that they’re in a position of authority, and could implement that advice.”

This is not rocket science.  Companies should put in place proper procedures to deal with corporate hospitality in line with SFO guidance.

Broadly this means companies should think about their corporate hospitality process, and pick a number above which approval is required.  If you want you can pick some more numbers above which a higher level of approval is required.

The key is to be able to justify why you picked approval thresholds and that the policy is actually followed.  Both should be well documented.

As Howard says: “By the way, that “zero dollars” idea doesn’t keep you safe.  The business will ignore it, sidestep it, and will do that for just about any advice you give from now on.”

August 3, 2012

From The Byrds to The Eagles: Lessons in the Evolution of Compliance in China

I regularly read the Lefsetz Letter, which is the best blog I know about the music business. While Bob Lefsetz, its founder and author, has received criticism from industry peers as someone who furthers himself by tearing others down, I find his personal reflection on songs, songwriters, bands and industry insiders that have affected his unique and independent outlook of the music industry to be some of the finest current writing on the music biz. In yesterday’s post, he talked about the transition of the folk music scene from Greenwich Village to Los Angeles and then charted it from The Byrds to The Eagles. He linked to a BBC documentary which demonstrated this shift. I thought about this change in music venues and musical tastes whilst thinking about some of the ongoing changes in how non-US and UK companies are responding to requirements of doing business under the Foreign Corrupt Practices Act (FCPA) and UK Bribery Act.

One of the areas which continues to raise a large number of questions for US businesses and for compliance officers is about the ritual of gift giving in Chinese business culture. Many US companies believe that it is important to offer gifts to senior people that are more expensive than those offered to their subordinates. However an ever growing number of Chinese companies now discourage gift giving. An article entitled “The Myths of Gift Giving” in the summer edition of the MIT Sloan Management Review explores this question and provides an interesting example from one Chinese company. As Chinese companies engage with partners, globally and locally, their internal and external business practices are evolving. Indeed the article found that many Chinese companies now put greater emphasis on professionalism and building trust and confidence in business capabilities.

The example of the Chinese company China Data Group (CDG) was cited in the article. CDG is a fast-growing company, based in Beijing, with over 4,000 employees, who develops technologies that provide business process outsourcing services for information-intensive industries such as insurance, credit cards and corporate banking. CDG created a goal to become less reliant on guanxi relationships. Guanxi relationships are often viewed as the basic dynamic in personalized networks of influence and are a central idea in Chinese society. However, in the case of CDG it sought to expand the company’s footprint globally by building the company’s brand equity, professionalism and service quality. This expansion targeted businesses in Japan and the US. To facilitate this growth strategy, the company began recruiting executives with substantial international experience.

The article reported that to try to overcome the tensions between the traditional norms of guanxi and new global expectations that the company set for itself, it initially established two separate sales organizations: the day team and the night team. The day team worked at client sites discussing projects, giving presentations and providing technical support. Their objective was to build confidence in the quality and reliability of CDG services. The night team would invite clients to dinner and other social events with the objective of building personal ties and rapport. In other words, the traditional guanxi of connections and relationships.

The company found that internal tensions erupted when CDG secured its largest contract ever from a local Chinese company who had received a cell phone from a senior CDG executive as a gift. Members of the CDG executive team were polarized. Some felt that the vice president in charge of the deal should be promoted. Others argued that such gift giving sullied the company’s reputation and the night team should be disbanded. What was the outcome of this internal discussion? The company moved to change its internal business practices so that expensive gift giving is no longer standard practice, and the night team was disbanded. The article ended with the intonation that the CDG “experience highlights how Chinese companies are moving away from some traditional cultural norms as they align their practices with international business standards.”

Lefsetz ended his piece with the following, “But this is how it worked back then. We followed the music. Business was one step behind…Music just does not have that power today. The California sound put so much money in the system, everybody wanted in. Hell, that company known as Time Warner? Its main asset is its cable system. You know what paid for that? The profits from the record companies!” The change wrought by the power of money may or may not be a good thing for the music business. Bob Lefsetz does not seem to believe so. However, the fact that Chinese companies are moving towards a more Western approach to business practices and compliance tells me that things are moving in the right direction in the compliance world.

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 tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

June 1, 2012

The Need to Recognize Cultural Differences When Creating a Compliance Program

In an article in the June issue of the Harvard Business Review (HBR), entitled “Why ‘I’m Sorry’ Doesn’t Always Translate”, authors William W. Maddux, Peter H. Kim, Tetsushi Okumura and Jeanne M. Brett wrote about the lack of understanding between Americans and Japanese over a “seemingly simply concept: the apology.”  The authors provided two examples, the first being that “Americans were unmoved by Toyota CEO Akio Toyoda’s effusive apologies in 2010, after widespread reports of malfunctioning accelerators.”, which they contrasted with the fact that the Japanese “bristled” when a US sub commander did not immediately apologize for surfacing without noticing a Japanese fishing boat was above him and thereby sinking the fishing trawler.

So what is the difference? The authors believe that Americans see an apology as an admission of “wrongdoing”. The authors found that Americans tend to link apologies with blame based upon our tendency to attribute actions to individuals and apologies often serve to establish personal responsibility. Conversely they found that East Asian cultures have a more group oriented culture. They noted that the Japanese “see it as an expression of an eagerness to repair a damaged relationship, with no culpability implied.” This leads to apology focusing on the larger consequences of the error. This dichotomy plays out in other areas, for instance, when the Japanese investigate a matter, it is usually designed to find a solution to the underlying problem. In the US, post-incident investigations tend to try to assess blame for the incident in question.

There are certainly other examples of cultural differences but the authors’ message is that something as simple as an apology can be one aspect “of a broad semantic disconnect between East and West that’s too often ignored in the rush to globalization.” This is also the message that my colleague Jay Rosen of MerrillBrink, short-term suffering Red Sox and Celtic fan, continually sends out to be sensitive in translations because if you are not sensitive you will certainly lose something in the translation. The authors end by noting that “Only with a deep understanding of such differences can executives make efficient use of the apology as a tool for facilitating negotiations, resolving conflicts and repairing trust.”

So what does this mean in your compliance program? Simply implementing a Western-centric anti-corruption or anti-bribery program without some cultural sensitivity can set the program up for failure. The issue of gifts and gift-giving in the Far East is quite different than in the US. It is often expected that a small gift be presented when meeting a person for the first time. Some companies ban all gifts to governmental officials based upon the perceived requirements of the Foreign Corrupt Practices Act (FCPA). I do not believe that the Department of Justice (DOJ) has ever taken the position that all gifts must be banned.

You can certainly present a small dollar value gift that is unique and might well be considered very appropriate under the circumstances. I would opine that you should have two considerations in determining the gift and making the presentation. The first is that whatever the gift is, it should not be readily convertible to cash. This means no gift cards of any kind, even a $5 gift card to Starbucks. If you can have your company name on the gift that is probably the best thing you can do to remove its monetary value on the secondary market. The second consideration is transparency. Can the gift be presented in public in front of the receiver’s co-workers? If the answer is yes, this would lead me to suggest that the gift is appropriate. However, if either the gift presenter or gift receiver does not feel comfortable in having the gift presentation in public, I think that you may have a problem.

So just as the words “I am sorry” can be mis-interpreted; so can matters in a compliance program. But if you show sensitivity and nuance, you may be able to avoid that “broad semantic disconnect” that the authors are concerned about in their article.

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 tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

April 2, 2012

Earl Scruggs: Banjo, Bluegrass and the Fight against Corruption and Bribery

Last Thursday, Earl Scruggs died. He was one of the musician’s most responsible for my development in learning about, and appreciating, different styles of music. For musicians, he basically invented and then popularized the 3 finger picking style on the 5 string banjo. For popular culture, he is probably best known for his work with guitarist Lester Flats, including the timeless hit “Foggy Mountain Breakdown”, the theme song from the movie Bonnie and Clyde, and for “Ballad of Jed Clampett” from the 1960s television show, The Beverly Hillbillies. However, for me, it was after he split with Lester Flats and started the Earl Scruggs Revue, with his sons and several other musicians. In the Revue, he fused rock, country, blues, folk and jazz with bluegrass in a way that I still find fresh and powerful today.

So what is the lesson of Earl Scruggs for the compliance practitioner? It is this, even if you develop a completely new style that makes you one of the foremost experts in an area, you can still evolve. Further, the style you use may have significant effects on other styles, even in the fight against bribery and corruption. For the compliance practitioner, this comes to mind with some news out of the world of anti-money laundering. We began the week with the notice from the UK Financial Services Authority of the agreed upon penalty with Coutts, a UK private banking entity. As reported in The Telegraph, in an article entitled “Coutts agrees to settle FSA fine for reduced fee”, Coutts was fined £8.75m (just over $14MM) “and severely censured by the UK’s Financial Services Authority (FSA) for failing to undertake sufficient anti-money laundering checks on their customers.” The Telegraph reporter Mike Goldman, quoting from the FSA report, wrote “The failings at Coutts were serious, systemic and were allowed to persist for almost three years,…Coutts was expanding its customer base during the Relevant Period and staff were incentivised in part to increase the number of customers taken on. As such, it was important that there were appropriate systems and controls in place, including with respect to the risk of money laundering. The weaknesses in Coutts’ controls resulted in an unacceptable risk of handling the proceeds of crime.”

On the heels of this enforcement action, the FSA followed last Thursday with the release of a report that included a review of 15 British banks who lacked sufficient anti-corruption and bribery checks. In an article in the New York Times (NYT), entitled “British Banks Called Weak In Checking Corruption”, Julie Werdigier reported on a FSA report which reviewed certain British banks during the second half of 2011. The review is a part of the FSA’s ongoing efforts “to improve the controls of ethical business behavior among financial institutions with offices in London.” The selection of the banks for review was based upon the high risk nature of the countries in which they were operating.

The FSA Director was quoted in a statement as saying, “Despite the high profile of the issue, the investment banking sector has been too slow and too reactive in managing bribery and corruption risk.” Further, the FSA found policies and procedures for gifts and entertainment were found to be lacking as well as the capacity for checking the backgrounds of prospective employees. The FSA also noted that gifts were not always correctly recorded and that it found instances of inappropriate hospitality.

The importance of having a robust anti-money laundering program was once again made clear last week when the Milan Branch of JPMorgan Chase closed a Vatican-held bank account based upon the suspicion of money laundering. In an article in The Daily Beast, entitled “JPMorgan Chase Closes Vatican Bank Account”, reporter Barbie Latza Nadeau discusses Chase’s decision to close the account “on speculation that the account is being used for less-than-immaculate financial deeds…after Vatican bankers were “unable to respond to a series of requests about questionable money transfers.” This was a continuation of bad news for Vatican banking as early this month, the US Department of State listed the Vatican as a “jurisdiction of concern for its money-laundering practices.”

Lastly, we take note of a French effort in the fight against global corruption. As reported in the Wall Street Journal (WSJ), in an article entitled “French Seize Assets of African Official”, France’s “top court allowed Transparency International to proceed” with a lawsuit against the son of the President of Equatorial Guinea. The son, while employed as the Minister of Agriculture of the country with an annual salary of $100,000, had the following items seized, “valuable paintings, vintage wines and multimillion dollar cars.” When his home was raided earlier in the year, the French officials found “a sauna, a movie theater, a nightclub, a beauty parlor, a spacious bathroom with gold-plated faucets, a wine cellar, and several other rooms decorated with marble statues and Fabergé eggs, according to court documents. Investigators seized all of the furniture that could be carried out, added a person familiar with the matter.” Ominously, the government of Equatorial Guinea warned the group’s lawsuit would “rupture relations” and that French companies would pay the price “from this situation.”

Just as Earl Scruggs led a musical revolution, first in bluegrass with his new picking style, then in expanding the boundaries of the genre, the fight against bribery and corruption is widening. If you are a compliance practitioner, you should take note of these international developments and have your company ready to respond.

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 tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

March 29, 2012

To Give or Not To Give and If So How, Under the FCPA

To give or not to give? That is certainly a question but it may also include the question of the value of the gift. Under the Foreign Corrupt Practices Act (FCPA) and UK Bribery Act gifts and entertainment continue to bedevil compliance practitioners, business unit personnel and compliance programs in general. Yesterday at the Dow Jones Global Compliance Symposium there was a panel discussion on gifts that raised some interesting approaches.

Rules Based Approach

One company had a fairly typical US rules based approach which set the dollar value of gifts and entertainment in two general categories; they are gifts and entertainment for foreign governmental officials and gifts and entertainment for non-foreign governmental officials. Interestingly the company also had a third category which was gifts and entertainment that its own employees could accept. The limits were lower for the foreign governmental official than the non-governmental official. If an employee desired to go over the specified limit, then Compliance Department approval is required. However, the Compliance Officer said that if the gift or entertainment request was reasonably detailed and a clear business purpose was articulated in the request, she would usually approve the request if the amount of money did not appear to be unreasonable.

The compliance officer reported some numbers from her company’s Ethics’ Helpline from the past year. Almost one-third of the calls which came into the Helpline were categorized as inquiries rather than reports of issues which were investigated. Of this group of inquiries, the largest single group, almost 25%, were questions about gifts and entertainment issues. So even with this rules based-bright line approach there were still many questions from the employee base on gifts and entertainment.

Values Based Approach

The second company took a different approach. Although it is a US company, it took a more European-centric, values based approach. It allowed the regions to set their own top end values to gifts and entertainment, based upon the nuances and risks of the geographic area. There was not the trichotomy of categories as listed above. The company compliance representative said that in their values based system, there was greater monitoring of employee gifts and entertainment by the compliance department and that they engaged in more training for employees on gifts and entertainment issues.

This monitoring was more extensive than in the rules based company. If an employee went above the overall company limit, the matter was investigated through an independent review of the amount spent; who it was spent on and the business purpose. This was then all written up and the independent investigator made a determination if a compliance issue violation had arisen. While this post-event work seems costly and disruptive to the business, the company representative said that it worked for her company.

Proportionality

One of the interesting discussions was on the issue of proportionality. Proportionality in the context of gifts and entertainment in anti-corruption compliance programs generally relates to the types of gifts or entertainment appropriate to be provided to a high level company official. One rule of thumb mentioned was if the entertainment provided was typical for a company executive and that executive could routinely pay for it, this was indicia that it was reasonable if provided from one senior level executive to another. There was mention of another company which had one gifts and entertainment policy for high level company officials and another policy for regular employees. All of this means that is may well be acceptable for your company President to entertain another company President at Wimbledon or other similar event.

Warning

Another panelist cautioned the audience to remember who would be reviewing gifts or entertainment in an investigation. He said that the view of Department of Justice (DOJ) attorneys, who might review such information in the context of a FCPA investigation, as to what is reasonable or even ‘modest’ is usually very different than the view of sales persons. Lastly, there was caution suggested about raising the limits of your gifts and entertainment policies if they are under review at this time. The panel believed that that current enforcement atmosphere makes such a move problematic at best.

The panel was quite good in setting out the parameters and types of gifts and entertainment policies. The message to me seemed to be the following: decide on a policy which works for your company and then follow it. But verify and verify. And finally, document, document and document.

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 tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

March 20, 2012

Mendelsohn and Denniston: A Compliance Dialogue

Last week I attended the 2012 Global Ethics Summit hosted by Ethisphere. The first event was a conversation between Mark Mendelsohn and Brackett Denniston, Senior Vice President and General Counsel of General Electric (GE). They both had some interesting observations on the current state of Foreign Corrupt Practices Act (FCPA) compliance. Dennison believes that the conversation on FCPA compliance has evolved to “What can organizations do to create a culture of compliance on a world-wide basis?” To answer this question he gave three overarching themes.

First it all starts with the ubiquitous “tone-at-the-top” but it means more than simply saying the right things on a regular basis. Denniston believes that senior management must “speak often and be sincere” in communicating this tone. If they are not sincere, he believes that employees will pick up on this immediately and any efforts to instill such a culture of compliance will be doomed to fail. Second, senior management must “walk the talk” through both discipline and a system of rewards. The discipline must be clear and delivered decisively. The rewards must be not only direct financial remuneration but also the internal promotion of persons who do business in an ethical manner, under the Company’s Code of Conduct. Lastly, a company as a whole must have the willingness to listen. He directed these remarks to helplines and other mechanisms where employees can report compliance violations or even raise concerns. He was clear that there must be be directly stated and enforced, that there is a no retaliation policy for all reports made in good faith. This also requires a company to keep accurate measurements of such reports and to design and refine its processes around these metrics.

Mendelsohn asked Denniston what were his three biggest challenges at GE regarding compliance and ethics. Denniston responded that the biggest challenge was in integrating acquisitions into the GE compliance culture. This is challenging in remote sites around the globe particularly in locations which do not have a senior management presence nor are visited by senior management on a regular basis. The second area is improper payments on a global basis. While noting that GE bans facilitation payments, these are still a challenge as are payments made through gifts, entertainment and travel. Lastly, he expanded his answer on the top three challenges to add regulatory compliance in general.

Denniston believes that the key for any company is how they will respond when a compliance issue arises. Within the GE world he said that the thing he worries about is that an issue will arise and the local business team will try to clean the matter and will not disclose it to the home office. From afar, such a response would appear as a cover-up of a reportable FCPA violation, even if no one in the US was involved. It could lead to a conclusion by the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) of an entire failure of a company’s compliance program. Recognizing that the cover-up is always worse than the original event, this would seem to echo Number 3 of Paul McNulty’s Maxims of “What did you do when you found about it [a compliance violation]?”

Picking up on his point about one of the things a company must do is listen to its employees, Denniston re-emphasized that communication is important but that a company must also measure the effect that these communications have. Metrics are an important aspect to creating and maintaining a culture of compliance at GE because it allows the company to base its compliance program enhancements on quantifiable data. He added that this helps dissipate the confusion between quality in the overall company compliance regime and simple regulatory compliance.

In a very interesting response to a Mendelsohn question along the lines of “is there too much FCPA enforcement?” Denniston responded that he did not think so as he believes that the DOJ has “got it right.” However, he does not believe this is the case with the SEC. He said that the problem, in his opinion, is around how much “fuzziness” there is from the SEC on the credit a company will receive for a self-disclosure. This is true even if the SEC has a principle which is consistent; Denniston believes that it does not always play out so clearly in practice.

Dennison ended his remarks in responding to a Mendelsohn question on “the single best compliance innovation at GE, during his tenure?” Being a good lawyer, Denniston had three single best compliance innovations. They were (1) every year GE tried to introduce a substantive improvement to its compliance program. These improvements are generated from a variety of sources, from local business unit employees to his aforementioned metrics to lead to an enhancement. (2) The continued efforts in the company to increase reporting of any compliance issues so that they might be evaluated by an appropriate compliance professional. He gave an example of a geographic region which had an inordinately low number of reports of compliance issues, which Dennison viewed as a negative. He sought to have this number increased by a minimum of 20% annually, which was achieved. In other words, if there are no reports, GE wants to know why there are no reports. (3) He said that there is now the creation of an unanticipated risk list. This has turned into an early warning system of issues that might pop up on the compliance radar, however it also forces all employees engaged in the exercise to come up with compliance issues the company is not currently thinking about in any detail.

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 tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

August 25, 2010

Promotional Expenses Defense under the FCPA

I.       The Problem

So what is the problem with a US company paying for travel, room and board for foreign governmental officials to travel to the United States? The problem is that payment for such travel, lodging and expenses may run afoul of the prohibition against corrupt payments (or promises of them) made to obtain or retain business. The Foreign Corrupt Practices Act (FCPA) allows payments to foreign officials for expenses related directly to “the promotion, demonstration, or explanation of products or services” that are “reasonable and bona fide” 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). This affirmative defense, however, is notoriously hard to use (and easy to abuse), mainly because no one is quite sure what reasonable and bona fide really mean.

In his recent post on the FCPA Blog, UCLA student Kyle Sheahen, explored this issue in his discussion of his upcoming publication, entitled “I’m Not Going to Disneyland: Illusory Affirmative Defenses Under the Foreign Corrupt Practices Act”. In his paper, he sets forth his proposition that FCPA enforcement actions provide “uneven indicators or what conduct the government considers covered by the defense. Consequently, in the absence of authoritative judicial interpretation or clear regulatory guidance, corporate managers are required to make educated guesses as to whether contemplated payments will qualify as “bona fide” promotional expenses.”;   he cites the following cases:

PROMOTIONAL EXPENSE ENFORCEMENT BOX SCORE

Company Trip Locations Trip Costs & Perks Company Facilities Present
Lucent Technologies Disneyworld, Hawaii, Las Vegas, Grand Canyon, Niagara Falls, Universal Studios, NYC -$10 million in trips for 1000 Chinese governmental officials, including $34,000 for five days of sightseeing None of the travel destinations
Ingersoll-Rand Trip to Florence after trip to company facility in Vignate, Italy $1000 ‘pocket  money’ per attendee Facilities in Vignate but not in Florence
Metcaf & Eddy First trip-Boston, Washington, D.C., Chicago and Orlando. Second trip-travel to Paris, Boston and San Diego. First Class Travel and trip expenses for Egyptian governmental official and his family. Cash payments prior to trips of 150% of estimated daily expenses.  Wakefield Mass not in Washington DC, Chicago, Paris or Disney World (Orlando)
Titan Corporation   Reference in company books and records of $20,000 for promotional travel expenses. Not clear if ever funded (Remember a promise to pay=making a payment under the FCPA)  
Not cited in Sheahen Paper      
UTStarcom Hawaii, Las Vegas and New York City Up to $7 million on gifts and all expense paid trips to US None of the travel destinations

 While the Department of Justice (DOJ) and/or the Securities and Exchange Commission (SEC) brought enforcement actions against the above companies, this author believes that the facts of each enforcement action demonstrate that the expenses incurred by the companies were neither reasonable nor bona fide as required under the FCPA. These cases do not require a FCPA compliance professional to guess, educated or otherwise, as to whether the travel, lodging and expense payments listed above violated the FCPA. The payment amounts noted above in the Box Score are so beyond the pale of reasonableness to be prima facie evidence of corrupt intent. Of course, it really does not help your case with the DOJ if you do not have company facilities in Disney World.

  1. II.    Opinion Releases  

In addition to detailing the above enforcement actions, Mr. Sheahen also discusses guidance that may be gleaned from DOJ Opinion Releases on the Promotional Expenses defense. Here he points to substantive guidance for the FCPA practitioner. In 2007, the DOJ issued two FCPA Opinion Releases which offered guidance to companies considering whether to and, if so how to, incur travel, lodging and expenses for government officials. In Opinion Release 07-01, the Requestor Company desired to cover the domestic expenses for a trip to the United States by 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.

Opinion Release 07-01 laid out the specific representations made to the DOJ which led to the DOJ approving the travel to the US by the foreign governmental officials. These facts can provide good guidance to any company which seeks to bring such officials to the US for a legitimate business purpose. In Opinion Release 07-01, 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.  

For  these representations, the DOJ noted, “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 Requestor Company desired to pay certain domestic expenses for a trip within the United States 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 Opinion Release 07-02 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). 

III. Travel, Lodging and Expenses for Governmental Officials 

What can one glean from these two Opinion Releases? In light of the facts it  would seem that a US Company should be able to bring foreign officials into the United States for legitimate business purposes. A key component is that the guidelines are clearly articulated in a Compliance Policy. Based upon Releases Opinions 07-01 and 07-02, 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 Policy 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. One of the FCPA violations alleged against UTStarcom was that it falsely recorded these trips as ‘training’ expenses, while the true purpose for providing these trips was to obtain and retain lucrative telecommunications contracts. All business gifts, entertainment and expenses must be properly recorded.

We commend Mr. Sheahen for his upcoming publication, in which he thoroughly discusses the “Local Law” defense under the FCPA in addition to the “Promotional Expenses” defense. His work will add to the discussion of these two affirmative defenses and assist companies in crafting their FCPA compliance program.

This article originally appeared in American Conference Institute Blog Site.

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 tfox@tfoxlaw.com.

© Thomas R. Fox, 2010

July 14, 2010

TOP 3 FCPA CASES OF 2010 PART II-(DING DONG) AVON CALLING

This is the second installment of our three part series on the Top 3 Foreign Corrupt Practices Act (FCPA) matters of 2010 to date and their significance for the FCPA compliance professional. In Part I we focused on the Gun Sting matter. Now we turn our attention to the Avon bribery scandal in China. 

As early as October 2008, Avon reported, in a Statement of Voluntary Disclosure, that it was investigating an internally reported allegation by an undisclosed whistleblower that corrupt payments had been made in its China operations. These allegations claimed that certain travel, entertainment and other expenses may have been improperly incurred. Although the details of the Avon case have not been disclosed, direct selling was not allowed in China under a law passed in 1998. The National Law Review reported that Avon was able to secure permission in late 2005 to begin direct selling on a limited basis. Later the Chinese government issued direct-selling regulations and granted Avon a broader license in February 2006 to make such sales.

In its 2009 Annual Report, Avon noted that the internal investigation and compliance reviews, which started in China, had now expanded to its operations in at least 12 other countries and was focusing on reviewing “certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees”. The FCPA Professor, citing the Wall Street Journal, reported that Avon suspended four employees, including the

President, Chief Financial Officer and top government affairs executive of Avon’s China unit as well as a senior executive in New York who was Avon’s head of Internal Audit.

 One of the significant pieces of information to come out of the Avon matter is the reported costs as reported in the 2009 Annual Report the following costs have been incurred and are anticipated to be incurred in 2010:

Investigate Cost, Revenue or Earnings Loss
Investigative Cost (2009) $35 Million
Investigative Cost (anticipated-2010) $95 Million
Drop in Q1 Earnings $74.8 Million
Loss in Revenue from China Operations $10 Million
Total $214.8 Million

Marketwatch also reported that after these additional investigations were made public Avon’s stock prices fell by 8%. Lastly, in addition to the above direct and anticipated costs and drop in stock value, the ratings agency Fitch has speculated about the possibility of a drop in Avon’s credit ratings. In a June 1 Press Release, Fitch noted that not only could the above listed investigative costs come out of Avon’s ordinary cash flow, thereby putting a strain on the company, but that Fitch would expect companies such as Avon to make every effort to comply during an agreed upon deferred prosecution period with the Department Of Justice (DOJ) given the severity of an indictment. 

An indictment for FCPA violation(s) would be viewed as ‘Event Risk’, a term used by Fitch to describe the risk of a typically unforeseen event to the analyst which, until the event is explicit and defined, is excluded from existing ratings. An indictment would be an externally triggered event that would generate a rating review based on materiality and impact. 

But what does all of this mean for the Chief Compliance Officer sitting in his office in the US? It should mean quite a bit. There are several lessons from which you can learn and immediately implement in your FCPA compliance program if you have not previously done so. 

But what does all of this mean for the Chief Compliance Officer sitting in his office in the US? It should mean quite a bit. There are several lessons from which you can learn and immediately implement in your FCPA compliance program if you have not previously done so. 

1.     Who is a “foreign governmental official”? China poses a major challenge for US companies trying to comply with the law. The DOJ has consistently interpreted the FCPA as extending to any employee working for a state-owned business. Further, in a communist country, the DOJ has taken this interpretation a step further by opining that all employees are state employees and therefore a foreign governmental official. This means that from top to bottom, all persons in China are covered by the proscriptions of the FCPA. This interpretation has never been tested in a US court but it puts the broad swaths of the Chinese economy directly under the FCPA. Couple this with the pressure felt by foreign companies to sponsor trips by Chinese regulators, who do not seem to be shy in asking for perquisites, and you have a situation which is ripe for a FCPA violation. 

2.     Travel, Gifts and Entertainment under the FCPA. The FCPA includes an affirmative defense for payments to officials related directly to “the promotion, demonstration, or explanation of products or services” that are “reasonable and bona fide” 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). That defense is loaded with uncertainty and very difficult for companies to safely use. It may well be that Avon provided trips to the US for the Chinese Regulators with regulatory oversight for Avon’s China operations, or gifts and entertainment which did not fall under the FCPA exemption. If so, the FCPA compliance professional should review the company policy on such matters.  

3.     Internal Enforcement of Company FCPA Compliance Policy. One of the employees suspended was the (former) head of Internal Audit. In addition to a strong FCPA compliance policy, a company should continually monitor its compliance program, through a strong internal audit program, to use  as a first line of defense to not only prevent FCPA violations before they occur but also detect FCPA compliance violations.  

A key ‘best practices’ FCPA compliance program component is to utilize internal audit to monitor for FCPA compliance issues on a regular basis to not only assess compliance but to also identify anything which warrants further investigation. Taken a step further, a continuous controls monitoring program can assist a company to identify unusual expenses, budgeted items, or any other event which is outside an established norm and Red Flag such expense, item or event for further investigation.

All of the facts of the Avon matter should be carefully studied by the Chief Compliance Officer of any company doing business in China. The case stands for the proposition that a company should not only have a robust FCPA compliance policy in place but that it must continually monitor the policy to ensure compliance.

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 tfox@tfoxlaw.com. 

© Thomas R. Fox, 2010

July 2, 2010

When a Rose is not a Rose but an FCPA Violation

 We recently wrote about gifts and entertainment under the Foreign Corrupt Practices Act (FCPA). To view the prior article, click here. This week the Securities and Exchange Commission (SEC) announced an enforcement action involving Veraz Networks. The enforcement action generally revolved around what one Veraz employee termed in an email as “the gift scheme”. Initially we would note that here in the US it is never a good idea to label any plan of action as a “scheme” and then to put it in an email as such labeling will always draw someone’s scrutiny. The gift scheme was made with the purpose to “improperly influence” foreign officials who were employees of Chinese and Vietnamese government-controlled telecommunications companies to award or continue to do business with Veraz.

Veraz, or its agents with the approval of Veraz, paid for the following amounts as gifts and entertainment: 

  1. $4,500 for gifts to the officials of the Chinese telecom company.
  2. An unreported amount for gifts and entertainment for the officials of the Vietnamese telecom company.
  3. An unreported amount for flowers to the wife of the CEO of the Vietnamese telecom company.
  4. Finally, Veraz failed to keep accurate books and records of all of the above.  

The penalty reportedly paid by Veraz was relatively small for current FCPA standards. The FCPA Blog reported that Veraz paid a penalty of only $300,000. The FCPA Professor noted in his posting on Veraz that in its Form 10Q filing for the period ending March 31, 2010, Veraz reported that it had shelled out $3.0 million to investigate and handle the FCPA compliance issues. So once again, the costs to investigate a matter are much larger than the final penalty. However, Veraz may still consider itself well off as there has been no report that Veraz agreed to a monitor or that a Department of Justice criminal action is in the offing. 

This enforcement action provides some additional guidance for what types of gifts and entertainment can be provided without one running afoul of the FCPA as this area is open to vagueness, and there are no clear guidelines in either the FCPA or its legislative history. While prohibiting payment of any money, or thing of value, to foreign officials to obtain or retain business, the FCPA arguably permits incurring certain expenses on behalf of these same officials. There is no de minimis provision set forth in the statute.

The presentation of a gift or business entertainment expense can constitute a violation of the FCPA if this is coupled with the corrupt intent to obtain or retain business. Under the FCPA, the following affirmative defense regarding the payment of gifts exists:

[it] shall be an affirmative defense [that] the payment, gift, offer or promise of anything of value that was made, was a reasonable and bona fide expenditure … and was directly related to…the promotion, demonstration, or explanation of products or services; or…the execution or performance of a contract with a foreign government or agency thereof. 15 U.S.C. § 78dd-1(c)(2)(A)-(B).

However, the Veraz case does provide direct and clear guidance in one area which has not been previously explored. It appears that a company should absolutely refrain from giving flowers to the wife of a company’s CEO. In other words, do not make the call to the florist and remember sometimes a rose is not just a rose especially when it comes to FCPA enforcement. 

For a copy of the SEC Complaint, click here

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 tfox@tfoxlaw.com.

 

© Thomas R. Fox, 2010

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