Ed. Note- For those of you who do not know her, Mary Shaddock Jones is one of the compliance professions I regularly rely on for advice. I continually ask her to send over some guest posts as they are always topical, top notch and provide practical advice for the compliance practitioner. I will be out of pocket over the next two weeks and Mary has agreed to take over the lion’s share of posts for my blog. Today she begins her series with a topical post on chocolates and the pre-holiday season from Halloween to Thanksgiving. I know you will not only enjoy her series but get quite a bit out of them.
This summer, the Securities and Exchange commission charged Texas-based medical device company Orthofix International with violating the Foreign Corrupt Practices Act (“FCPA”) through improper payments of bribes (code named “chocolate”) to officials at Mexico’s government-owned health care and social services institution, Instituto Mexicana del Seguro Social (“ IMSS”), in order to obtain or retain business. Sure, for those of you who regularly read Tom Fox’s blog, this is old news. However, since he is off and today is Halloween, I thought I would start a series for the next two weeks re-examining some of the more recent, and perhaps not so recent cases with a fresh set of eyes.
The practical pointer for today’s blog is straightforward – it is imperative that companies which have FCPA exposure audit both their petty cash accounts, and all expenses coded to training and promotion. This is apparently where the improper expenditures were “hidden” by employees of Orthofix. In my experience, companies need to be closely reviewing what little case law or factual allegations exist with regard to the FCPA so that they too know where to find any potential problems that may exist within their own company. There are only so many ways to hide the dollar. If you find yourself sitting in front of the DOJ and/or SEC in the future on allegations related to a violation of the FCPA…you will not gain any “chocolate points” if you haven’t implemented a robust compliance program. But as FCPA practitioners have said over and over again – simply having a Code of Business Conduct, an Anti-Corruption Policy Manual and even person to person training is not enough. You have to be proactive in trying to find what others don’t want to be found. That is why the Orthofix employees didn’t book the improper payments as “bribes”. They aren’t stupid. They know this is one red flag that will stop the energizer bunny in its tracks. So instead, they disguise the improper payments in a way that they think is clever.
According to the SEC, in order to obtain cash for the bribes, the Promeca executives wrote checks to themselves, which they justified as “cash advances”. A smart person in the accounting department would ask – what was the cash advance for? What was bought? Are their valid receipts which state what was bought, when was it bought, who was taken to dinner or lunch, what was discussed, etc? In order to continue the deception, the executives submitted false receipts for imaginary expenses including meals and new car tires. Practical Pointer: It may be a boring and tedious task, and one which hopefully never uncovers questionable payments – but companies must have someone in charge of reviewing expense reports – for everyone – from the top dog on down to the dog walker. Do you have a process in place for reviewing expense accounts? If not, put one in place.
Unfortunately for Orthofix, the improper payments became too large to hide in expense reports; therefore, a new hiding place had to be located. The next best thing to expense reports is training and promotional expenses. Remember that the FCPA includes three affirmative defenses under its anti-bribery provisions – the first of which is “reasonable and bona fide expenditures related to certain promotional activities”. If the FCPA allows the payment for “promotional expenses”, what better place to hide improper payments than in plain sight? Just because someone calls an expense a promotional expense, does not mean that the Company does not have to trust, but verify.
Specifically, the FCPA permits payments if the payment to a foreign official was a “reasonable and bona fide expenditure, such as travel or accommodation expense, that was directly related to the demonstration of a product or service, or performance of a contract with a governmental agency.” Unfortunately, I was unable to determine from the public filings how the training or promotional payments were characterized so as to allow them to remain undetected by the accounting department at Orthofix until hundreds of thousands of dollars in improper payments had been made. However, the practical pointer for you is this – do you have a process in place which places controls over when expenditures can be made for travel and lodging/training and/or promotional/marketing expenses?
Consider the following policy language:
The FCPA permits the payment of reasonable and bona fide expenditures on behalf of a Government Official and directly related to (1) the promotion, demonstration, or explanation of products or services; or (2) the execution or performance of a contract with a non-U.S. government or agency thereof.
Travel and Lodging: No travel or lodging may be offered or given to a Government Official without the prior written consent of the Company Compliance Officer or his or her designee and must meet the following guidelines: (1) it serves a legitimate Company business purpose; (2) invitations to a Government Official are transparent, in writing, and clearly state the business purpose of the trip; (3) no payment is made directly to a Government Official either through an advance or reimbursement for expenses (the Company should directly purchase travel or lodging from those who provide them, utilizing a travel agent or other third party if possible); (4) providing “per diem” fees or expenses is avoided, particularly where meals are already being provided; (5) no cash payments to a Government Official are made whatsoever; (6) travel and lodging expenses are only provided for the identified Government Official and not for spouses, family, or friends of the Government Official; (7) travel arrangements are directly between the place of residence or employment of the Government Official and the intended destination of the business travel, with no non-business side trips; (8) no reimbursements are paid without presentation of appropriate receipts; (9) providing the travel or lodging is permitted under local law and regulations and guidelines of the recipient’s governmental entity (note that some customers have strict policies against receiving gifts); and (10) other than the travel or lodging identified above, the Government Official is not compensated for his or her participation in the planned trip.
Guidelines for Entertainment: Unless prior written approval from the Company Compliance Officer or his or her designee is obtained, entertainment provided to a Government Official must meet the following guidelines: (1) it serves a legitimate Company business purpose; (2) providing the entertainment is permitted under local law and regulations and guidelines of the recipient’s governmental entity (note that some customers have strict policies against receiving gifts); (3) it is of the type and value that is reasonable (not lavish, excessive, or frequent); (4) it is in line with the local customs of the country where provided; (5) it is of a type that is appropriate (e.g. no strip clubs); and (6) it is accurately recorded in the Company’s books and records.
Guidelines for Marketing Expenses: Unless prior written approval from the Company Compliance Officer or his or her designee is obtained, marketing materials (such as pens, caps, or mugs) provided to a Government Official must meet the following guidelines: (1) they serve a legitimate Company business purpose; (2) they are of nominal value; (3) they are of the type and value that are customary and appropriate for the occasion;(4) they are branded with the Company’s name and/or logo; (5) they are permitted under local law and regulations and guidelines of the recipient’s governmental entity (note that some customers have strict policies against receiving gifts); and (6) they are fully and accurately recorded in the Company’s books and records.
Remember, it is not enough to simply have a policy in place; you must also conduct trainings (have the training in both English and the predominant local language of your employees) and audits to ensure compliance.
No more chocolates for today… tomorrow is All Saints Day. Stay tuned to see who didn’t perhaps make the list of saints.
Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries. She was of the first individuals in the United States to earn TRACE Anti-bribery Specialist Accreditation (TASA). She can be reached at email@example.com or 337-513-0335. Her associate, Miller M. Flynt, assisted in the preparation of this series. He can be reached at firstname.lastname@example.org.
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.