One of the first thing that many companies will try to put in place is a gifts, entertainment and travel policy when looking at an overall compliance program. I find the reality to be that not only is this one of the more easier things to implement because one of the most consistent things taught at any organization, of one person or more, is to record the even and keep receipts. The base reason is not corporate or even Foreign Corrupt Practices Act (FCPA) record keeping. It is IRS Regulations. Even lawyers know you have to keep receipts. This means getting employees to document, document and document, who they may have taken to dinner or entertained, the amount, the business purpose and if they were a foreign government official, their title, this does not seem like too much of a stretch to ask.
The part that does seem different, or new, to employees is the limit. By this I mean the amount of money which can be spent on a dinner, gift or entertainment without prior approval from the compliance function. For any expenditure above those predefined limits an employee must seek pre-approval from the compliance function prior to exceeding or incurring the expense.
An on-going debate is whether to take a hard and fast line over which all employees must come to the compliance function for pre-approval regarding any gifts and entertainment. Many sales people like this approach because they want to know precisely what the line is that they can go up to. Companies may take a more values-based approach, which looks at the overall value an employee may spend over a one year or other time period but the monitoring is at the backend of the transactions.
A rules based approach is one which generally sets a dollar threshold for 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. Below the threshold, employees can provide gifts and entertainment without the need for pre-approval, above the threshold; employees have to seek pre-approval from the compliance function. Limits are typically lower for foreign governmental officials than non-governmental officials. The gift or entertainment request from the employee requires a reasonably detailed business purpose and the monetary request involved should not appear to be unreasonable.
The second approach is a more 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. The responsibility of the compliance department in such a values based approach would be two-fold. The first would be to engage in more training for employees on gifts and entertainment issues. The second would be greater monitoring of employee gifts and entertainment.
Values based monitoring is more extensive than for rules based monitoring. If an employee goes above the overall company limit, the matter must be investigated through an independent review of the amount spent; who it was spent on and the business purpose. This must then be written up and the independent investigator must make a determination of whether a compliance issue violation has occurred. While this post-event work seems costly and disruptive to the business, company representatives say this works for them.
One of the interesting tangents in the area of gifts and entertainment is the issue of proportionality. Proportionality in the context of gifts and entertainment in anti-corruption compliance programs generally relates to the appropriate types of gifts or entertainment to be provided to a high-level company official. One rule of thumb is 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. But you must remember about how such information will be viewed in the context of a FCPA investigation, as to what is reasonable or even ‘modest’ is usually very different than the view of a sales person.
A. The Statute
Under the FCPA, the following affirmative defense regarding the payment of expenses 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, such as travel and lodging expenses, incurred by or on behalf of a foreign official, party, party official, or candidate 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).
There is no de minimis provision. 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.
B. FCPA Guidance
There was a good discussion of gifts and entertainment in the FCPA Guidance. In it the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) made clear that “A small gift or token of esteem or gratitude is often an appropriate way for business people to display respect for each other. Some hallmarks of appropriate gift-giving are when the gift is given openly and transparently, properly recorded in the giver’s books and records, provided only to reflect esteem or gratitude, and permitted under local law…”
Just as reasonably priced gifts are appropriate to give out, the FCPA Guidance specifies that “… Items of nominal value, such as cab fare, reasonable meals and entertainment expenses, or company promotional items, are unlikely to improperly influence an official, and, as a result, are not, without more, items that have resulted in enforcement action by DOJ or SEC.” However, as the costs and value begin to rise, so does the potential FCPA risk. The FCPA Guidance states, “The larger or more extravagant the gift, however, the more likely it was given with an improper purpose. DOJ and SEC enforcement cases thus have involved single instances of large, extravagant gift-giving (such as sports cars, fur coats, and other luxury items) as well as widespread gifts of smaller items as part of a pattern of bribes. For example, in one case brought by DOJ and SEC, a defendant gave a government official a country club membership fee and a generator, as well as household maintenance expenses, payment of cell phone bills, an automobile worth $20,000, and limousine services. The same official also received $250,000 through a third-party agent.”
The FCPA Guidance does specify some types of examples of improper travel and entertainment as follows:
- $12,000 birthday trip for a government decision maker from Mexico that included visits to wineries and dinners;
- $10,000 spent on dinners, drinks, and entertainment for a government official;
- A trip to Italy for eight Iraqi government officials that consisted primarily of sightseeing and included $1,000 in “pocket money” for each official;
- A trip to Paris for a government official and his wife that consisted primarily of touring activities via a chauffeur-driven vehicle.
The FCPA Guidance points out something that is rather obvious. If a company has a culture of compliance in the area of gifts, travel and entertainment that allows violations of the FCPA, it probably is lax in other areas. We recently saw this played out in the Hewlett-Packard (HP) FCPA enforcement actions where lax internal controls allowed HP-Poland to pay over $600,000 in cash to a Polish government official; pay for his travel to Las Vegas at full HP expense and also purchase him gifts valued at over $30,000. The gifts, travel and entertainment on their own could have been stand-alone FCPA violations but they were certainly symptomatic of an entire culture at HP-Poland, which allowed such conduct to occur.
Tomorrow we will review some enforcement actions and Opinion Releases.
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© Thomas R. Fox, 2014