The recent post on charitable donations under the Foreign Corrupt Practices Act (FCPA) and Opinion Release 10-02 brought an interesting dialogue with fellow blogger, the FCPA Professor. The FCPA Professor raised the issue of “compelled giving” disguised as a requirement that a US company doing business overseas makes a charitable donation with the implicit understanding that such a requirement is mandated to obtain or retain business by a foreign governmental official and how such payments would be viewed under the FCPA. We believe that the underlying facts of the Opinion Release referenced demonstrate that the Department of Justice (DOJ) has recognized that compelled giving is a situation that is faced by US companies doing business overseas, if not on a regular basis, but certainly one that is not unknown.

In Venezuela energy service contracts with the national oil company, PDVSA requires that the foreign company must agree to invest an established percentage of the profits from each contract into the community in which it operates. This is negotiated with the Venezuelan government and can include cash or in-kind contributions of computers, equipment or appliances to schools, communities or organizations. This requirement may also be present in contracts for infrastructure opportunities including communications and transportation.

Although it is legal and a practice required by law in Venezuela, these payments have generated some questions with regards to compliance with the FCPA and similar laws of other countries. While not a payment to a governmental official, it is still a payment to a governmental entity for the purpose of securing a contract. It may also be that a governmental official sits on the Board of the local charity in question. Such issues require careful consideration.

There appears to be only one FCPA enforcement action based entirely upon charitable giving. It is the case of Schering-Plough Poland which paid a $500,000 civil penalty assessed by the Securities and Exchange Commission (SEC) in 2008. As reported in the FCPA Blog, the Company’s Polish subsidiary made improper payments to a charitable organization named the Chudow Castle Foundation, which was headed by an individual who was the Director of the Silesian Health Fund during the time period in question. Schering-Plough is a pharmaceutical company and the Director of the Health Fund provided money for the purchase of products manufactured by Schering-Plough as well as influencing medical institutions, such as hospitals, in their purchase of pharmaceutical products through the allocation of health fund resources. In addition to the above, the SEC found that Schering-Plough did not accurately record these charitable donations on the company’s books and records.

The FCPA Blog further reported that when asked about the guidelines regarding requests for charitable giving and the FCPA then Deputy Chief of the Criminal Division’s Fraud Section at the DOJ Mark Mendelsohn, said that any such request must be evaluated on its own merits. He advocated a “common sense” approach in identifying and clearing Red Flags. This would include determining if a governmental decision maker held a position of authority at the charity to which the donation would be made, whether the donation was consistent with a company’s overall pattern of charitable giving, who made the request for the donation and how was it made.

The series of Red Flags raised and cleared by the US company which was the subject of Opinion Release 10-02. After initially listing the 3 levels of due diligence in which the company had engaged prior to finalizing its choice of local entity to receive the donation in question; the DOJ noted that the donation ‘requested’ of the US company would be subject to the following controls:

  1. Payments of the donations would be staggered over a period of eight quarters rather than in one lump sum.
  2. Ongoing monitoring and auditing of the funds use for a period of five years.
  3. The donations would be specifically utilized for the building of infrastructure.
  4. The funds would not be paid to the parent of the organization receiving the grant and there was an absolute prohibition on compensating Board Members.
  5. The proposed grant agreement under which the funds would be donated had significant anti-corruption provisions which included a requirement that the local organization receiving the funds adopt an anti-corruption policy and that US company making the donation receive full access to the local organization’s books and records.

Both the underlying due diligence and the controls noted above led the DOJ to state “The Department is satisfied, however, that the Requestor has done appropriate due diligence and that the controls that it plans to institute are sufficient to prevent FCPA violations.”

In addition to the specific factors presented by the requesting US company in Opinion Release 10-02, the DOJ also listed several of the due diligence and/or controls that it had previously set forth in prior Opinion Releases relating to charitable donations. These included:

• certifications by the recipient that it will comply with the requirements of the FCPA;

• due diligence to confirm that none of the recipient’s officers or directors are affiliated with the foreign government at issue;

• a requirement that the recipient provide audited financial statements;

• a written agreement with the recipient restricting the use of funds to humanitarian or charitable purposes only;

• steps to ensure that the funds were transferred to a valid bank account;

• confirmation that contemplated activities had occurred before funds were disbursed; and

• ongoing auditing and monitoring of the efficacy of the program.

We believe that Opinion Release 10-02 addresses some of the concerns of US companies in the area of compelled giving; particularly in view of the enforcement action involving Schering-Plough. The DOJ, once again, has indicated that extensive due diligence, coupled with the best practices in compliance management going forward after the contract is executed, appear to be critical in its analysis. We also wish to thank our blog colleague the FCPA Professor for his timely and pointed questions which raised further interest in this area.

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

Ed. Note-today we are please to have our initial guest post for the blog. Our guest author-Lindsay Walker is Content Developer at Customer Expressions Corp. Thomas Fox

There’s no point investing in and implementing an ethics and compliance program unless the time is spent integrating the program into every aspect of an organization. The need for companies to develop effective ethics and compliance programs has been acknowledged by several government agencies- examples are the SEC in the US and the government in the United Kingdom. Both groups have recently passed legislation or made amendments to existing guidelines, focusing heavily on the importance of ethics and compliance at all levels of an organization- especially at the top. Employees at each level contribute to the success of a company’s ethics and compliance program. Integrating ethics and compliance at each level helps ensure the message from the top makes it all the way down to the lower levels of the organization. Training, messages and other ethics and compliance initiatives must be developed to evolve with employees as they move through the company. That being said, employees at various levels need to be prepared to address different ethical issues they may encounter based on the role they play in the organization.

Integrating Ethics at the Top
The tone of the organization is set at the top, therefore, a strong commitment and understanding of ethics and compliance must be instilled in top level executives and managers. Ethics and compliance must be built into a company’s corporate culture, as culture determines “the way things are done” within an organization. Top level executives serve as examples for fellow employees. Those at the top must frequently communicate and demonstrate to their staff the company’s commitment to ethics and compliance, as well as ensure ethics and compliance are built into all company projects. Top level managers must adopt and act on the values and messages they communicate to be considered credible in committing to ethics.
If your company hasn’t done so already, establish the role of a Chief Ethics/Compliance Officer (CECO). This person will be responsible for maintaining and executing ethics and compliance related activities (policy development, training, policy enforcement, program monitoring) to ensure company compliance with laws and regulations. One of the areas many companies must improve on is providing the CECO with appropriate resources and authority to effectively carry out their mission. In many organizations, the ethics and compliance department is relatively small in comparison to the total number of employees at a company. With the recent economic downturn, a number of companies were forced to reassess budgets, cutting ethics and compliance spending at a time when it was needed most. Don’t create positions or policy documents for the sake of looking good in the eyes of the public- the public can tell if a company is faking it.
Integrating Ethics in the Middle 
In many companies, employees report that the middle level is where ethics and compliance commitments break down. Since many of the lower level employees report directly to those in the middle, a commitment to ethics and compliance from middle managers is equally as important as it is at the top. Top level managers can use a number of techniques to assist mid-level managers in understanding the role they play in creating an ethical workplace. In the article “Ethics and the Middle Manager: Creating Tone in The Middle,” by Kirk O. Hanson, the author lists 8 ways top management can motivate middle level employees to reinforce an organization’s ethical culture:
1. “Top executives must themselves exhibit all the ‘tone at the top’ behaviors, including acting ethically, talking frequently about the organization’s values and ethics, and supporting the organization’s and individual employee’s adherence to the values.
2. Top executives must explicitly ask middle managers what dilemmas arise in implementing the ethical commitments of the organization in the work of that group
3. Top executives must give general guidance about how values apply to those specific dilemmas.
4. Top executives must explicitly delegate resolution of those dilemmas to the middle managers.
5. Top executives must make it clear to middle managers that their ethical performance is being watched as closely as their financial performance.
6. Top executives must make ethical competence and commitment of middle managers a part of their performance evaluation.
7. The organization must provide opportunities for middle managers to work with peers on resolving the hard cases.
8. Top executives must be available to the middle managers to discuss/coach/resolve the hardest cases.”
Integrating Ethics at Lower Levels
Lower level employees are usually the ones on the frontlines acting as ambassadors for a company/brand. Ensuring the commitment to ethics and compliance is as strong at the bottom as it is at the top is critical to the success of a fully integrated ethics and compliance program. One of the easiest ways to begin implementing ethics and compliance within lower levels is to provide new hires with extensive training on company expectations and ethics and compliance. During the interview process, ask questions related to ethical situations and decision making. This can be used as a way to ensure new hires are a proper fit with the existing corporate culture. It’s important to remember that ethics training and implementation doesn’t stop here- this is just the beginning.
An Ethisphere article, “If Ethics Isn’t Everywhere, It’s Nowhere,” reviews some of the tactics deployed at Jones Lang LaSalle to ensure ethics is integrated into every level of their organization:
“We begin the process by mentioning ethics in our offer letters. We continue by having new hires read and agree to our Code of Business Ethics, which has been translated into 14 languages. And employees see ethics posters displayed in lunchrooms and receive wallet-sized reminders at meetings. To further entrench our ideals in the minds of employees, our Ethics Officers attend business meetings and lead discussions with employees about ethical dilemmas. These sessions require active participation because we don’t just want a ‘talking heads’ presentation with a forgettable PowerPoint. To receive a bonus, everyone, including me, is required to re-certify to his or her commitment to the Code of Ethics. The norm, as you can well imagine, is 100% compliance. When employees leave the firm, we send them a reminder about their on-going obligations regarding confidential client and employee information they received while employed by Jones Lang LaSalle.”
© Lindsay Walker

About the Author

Lindsay Walker is a writer for the i-Sight Investigation Software blog at Customer Expressions. The i-Sight blog focuses on ethics and compliance news, policy development and amendments, industry best practices and investigation tips and techniques. i-Sight provides customized case management solutions for HR, employee relations, corporate security, privacy and ethics and compliance investigations. She can be reached at LWalker@customerexpressions.com.

 This publication contains general information only and is based on the experiences and research of the author. Neither the author nor this blog site 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. Neither the author nor this blog site, its affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. Thomas R. Fox, 2010 

What is a company to do if, in order to obtain a contract with a foreign government, they must agree to invest a percentage of the proceeds of the transaction into the community in which it operates as a “charitable donation”? This is negotiated with the foreign government and can include cash or in-kind contributions of computers, equipment or appliances to schools, communities or organizations.

While not a payment to a governmental official, it is still a payment to a governmental entity for the purpose of securing a lucrative contract and requires careful consideration. This spectra is currently required in some countries by law and these payments have generated some questions with regard to compliance with the Foreign Corrupt Practices Act (FCPA) as such donations could be interpreted as corruptly giving or offering anything of value to any “foreign official” in order to assist “in obtaining or retaining business for or with, or directing any business to, any person . . . .” 15 U.S.C. § 78dd-2(a)(1).

As reported in Friday’s FCPA Blog, this past week the Department of Justice (DOJ) published its second FCPA Opinion Procedure Release of 2010, 10-02. The release dealt with a US based micro financial institution (MFI) operating in an unnamed Eurasian country. This MFI desired to convert its local operations from a “humanitarian status” to a commercial status. The relevant government licensing authority in the country in question required that as a condition precedent to obtaining this commercial license, the MFI would be required to make a substantial grant to some other local MFIs, providing a list of one or more that the US MFI could choose. The US MFI was concerned that by making such a donation a condition precedent and specifying the list of local MFIs to which the donation could be made, the US MFI could run afoul of the FCPA’s proscription of “corruptly giving or offering anything of value to any foreign official” in order to assist “in obtaining or retaining business for or with, or directing any business to, any person . . . .”

In stating that the DOJ “does not intend to take any enforcement action with regard to the proposed transaction” the Opinion Release specified the three levels of due diligence that the US MFI had engaged in on the proposed locals MFIs which were listed as eligible to receive the funding. The DOJ noted that [it] “is satisfied, however, that the Requestor has done appropriate due diligence and that the controls that it plans to institute are sufficient to prevent FCPA violations. As noted above, the Requestor [US MFI] conducted three rounds of due diligence. The controls that the Requestor proposes would ensure with reasonable certainty that the grant money from the Eurasian Subsidiary would not be transferred to officials of the Eurasian country.”

 In addition to the specific discussion of the due diligence performed by the US MFI and noting the controls it had put in place after the funding was scheduled to be made the DOJ also listed several of the due diligence and/or controls that it had previously set forth in prior Opinion Releases relating to charitable donations. These included:

• certifications by the recipient that it will comply with the requirements of the FCPA;

• due diligence to confirm that none of the recipient’s officers or directors are affiliated with

the foreign government at issue;

• a requirement that the recipient provide audited financial statements;

• a written agreement with the recipient restricting the use of funds to humanitarian or charitable purposes only;

• steps to ensure that the funds were transferred to a valid bank account;

• confirmation that contemplated activities had occurred before funds were

disbursed; and

• ongoing auditing and monitoring of the efficacy of the program.

Opinion Release 10-02 provides a wealth of information to the FCPA practitioner and  compliance counsel. It gives specific guidance on the levels of due diligence that a US company should go through when investigating a charitable institution selected, or suggested by a foreign governmental official, to be the recipient of a company’s charitable donations. Further it lists the controls that a US company can and should put in place, should it determine that a charitable donation is to be made. In short Opinion Release 10-02 gives significant guidance in pre-donation due diligence investigation, evaluation and post donation monitoring going forward to manage the process. Opinion Release 10-02 is a very large and helpful educational tool in the FCPA compliance arena. We welcome its release.

For a copy of Opinion Release 10-02, 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  

© Thomas R. Fox, 2010

Both the US Sentencing Guidelines and the Organization for Economic Co-operation and Development (OECD) Good Practice Guidance on Internal Controls, Ethics, and Compliance consider one of the key items for a best practices compliance program to be the appropriate “Tone at the Top.” 

The US Sentencing Guidelines reads:

High-level personnel and substantial authority personnel of the organization shall be knowledgeable about the content and operation of the compliance and ethics program … and shall promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. 

The OECD Good Practices reads 

1. strong, explicit and visible support and commitment from senior management to the company’s internal controls, ethics and compliance programs or measures for preventing and detecting foreign bribery; 

The Foreign Corrupt Practices Act (FCPA) world is riddled with cases where the abject failure of any ethical “Tone at the Top” led to enforcement actions and large monetary settlements. In the two largest monetary settlements of enforcement actions to date, Siemens and Halliburton, for the actions of its former subsidiary KBR, the government specifically noted the companies’ pervasive tolerance for bribery. In the Siemens case, for example, the Securities and Exchange Commission (SEC) noted that the company’s culture “had long been at odds with the FCPA” and was one in which bribery “was tolerated and even rewarded at the highest levels”. Likewise, in the KBR case, the government noted that “tolerance of the offense by substantial authority personnel was pervasive” throughout the organization. 

In addition to the two cases set out above, in a 2003 report, the Commission on Public Trust and Private Enterprise cited a KPMG survey covering selected US industries; found that 37 percent of employees had, in the previous year, observed misconduct that they believed could result in a significant loss of public trust if it were to become known. This same KPMG survey found that employees reported a variety of types of misconduct and that the employees believed this misconduct is caused most often by factors such as indifference and cynicism; pressure to meet schedules; pressure to hit unrealistic earnings goals; a desire to succeed or advance careers; and a lack of knowledge of standards. 

So how can a company overcome these employee attitudes and replace the types of corporate cultures which pervaded at Siemens and KBR and re-set its “Tone at the Top”? In a 2008 speech to the State Bar of Texas Annual Meeting, reprinted in Ethisphere, Larry Thompson, PepsiCo Senior Vice President of Governmental Affairs, General Counsel and Secretary, discussed the work of Professor Lynn Sharp at Harvard. From Professor Sharp’s writings, Mr. Thompson cited five factors which are critical establishing an effective integrity program and to set the right “Tone at the Top”. 

1)      The guiding values of a company must make sense and be clearly communicated.

2)      The company’s leader must be personally committed and willing to take action on the values.

3)      A company’s systems and structures must support its guiding principles.

4)      A company’s values must be integrated into normal channels of management decision making and reflected in the company’s critical decisions.

5)      Managers must be empowered to make ethically sound decisions on a day-to-day basis. 

The subject of management making significant changes in the manner in which a business is run has long been the topic of the business press. Most recently, the current issue of the Harvard Business Review was entitled, “Managing Change: How to do it and When to do it”. In an article entitled, “The Decision-Driven Organization”, it cited the example of Ford Motor Company and its recent business turn around, in explicitly setting out a company’s decision to change a company’s business tone. When Allan Mulally became Chief Executive Officer (CEO) in 2006, he found the company in dire need of a change in business direction. Rather than change the company’s structure and then consider the change which would come thereafter, he made the decision to change the direction of the company and then put the structure in place to facilitate that change. 

In large part the change led by Mulally was based upon the five steps noted above with. Mulally substituting ‘a different way of business’ for ethics, however the message is clear. Just like the change at Ford Motor Company being led by the CEO, the transformation in ethics and compliance must be led by the CEO. Employees take their lead from the very top management of a company. If the CEO takes the opportunity to discuss ethics and compliance at every town hall meeting, in newsletters, posters and other types of communications this message is constantly reinforced.

 It is clear from the Harvard Business Review article that management change can occur. If your company does not have the correct “Tone at the Top” it can make the change. The five points set out by Thompson give a clear path to achieving the right tone to move forward with a FCPA compliance policy. Both the US Sentencing Guidelines and the OECD Good Practices are looking to top management to set a company’s tone for the values of ethics and compliance. But more importantly your employees are too. 

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

At the recent Corporate Counsel Institute – Europe put on by Georgetown University Law, participant Matthew King, Group Head of Internal Audit at HSBC was interviewed by Project Counsel Founder Gregory P. Bufithis on his opinion regarding one of the more important elements for implementing a successful compliance program. Mr. King stated that in his opinion, one of the key features of any successful compliance program was “escalation”.

By this he meant that in almost every circumstance regarding a compliance issue he had been involved with, at some point a situation arose where an employee did not report a situation or event up to an appropriate level for additional review. This failure to escalate led to the issue not reaching the right people in the company for review/action/resolution and the issue later became more difficult and more expensive to deal with in the company. Mr. King emphasized that a company needs to have a culture in place to not only allow elevation but to actively encourage elevation. Additionally both a structure and process for that structure must exist. Lastly, while a whistleblower process or hotlines are necessary these should not be viewed as the only systems which allow an employee to escalate a concern.

An example of this failure of escalate was recently seen in the HP matter involving its German subsidiary and allegation of bribery to receive a contract for the sale of hardware into Russia. The Wall Street Journal has reported that at least one witness has said that the transactions in question were internally approved by HP through its then existing, contract approval process. Mr. Dieter Brunner, a bookkeeper who is a witness in the probe, said in an interview that he was surprised when, as a temporary employee of HP, he first saw an invoice from an agent in 2004. “It didn’t make sense,” because there was no apparent reason for HP to pay such big sums to accounts controlled by small-businesses, Mr. Brunner said. He then proceeded to say he processed the transactions anyway because he was the most junior employee handling the file, “I assumed the deal was OK, because senior officials also signed off on the paperwork”.

Think what position HP might be in today if this temporary employee had escalated his concern. Initially, HP would not have been under investigation by governmental authorities in Germany and Russian. In the United States, both the DOJ and SEC have announced they will also investigate the transaction, which it can only be supposed are for potential FCPA violations. While HP has not made any public announcements regarding the costs of the investigation date, it can only be speculated that the costs will be in the millions if HP is required to deal with investigators from these three jurisdictions as well as perhaps investigating other international operations to ascertain if other commissions paid involved similar allegations of bribery and corruption as those in this German-subsidiary’s transaction.

So is your company encouraging its employees to escalate their concerns regarding a transaction or do your employees simply approve a transaction because everyone else has done so?

For the YouTube video of the Gregory P. Bufithis interview of Matthew King, see 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