Asking a Brazilian-based company not to use the World Cup as a business development opportunity, most particularly when Brazil is hosting the World Cup, seems to be highly unlikely. Yet, if that same Brazilian company holds American Depository Registry shares, making itself subject to the Foreign Corrupt Practices Act (FCPA), the company might want to consider putting in place internal controls to help set expectations and then manage the obvious risk. Unfortunately, this insight did not seem to have occurred to Telefônica Brasil S.A. (Telefônica Brasil), a subsidiary of Telefónica S.A., a Spanish multinational broadband and telecommunications provider with worldwide operations, and is the largest telecommunications company in Brazil with headquarters in São Paulo.

Last week the Securities and Exchange Commission (SEC) announced the resolution of a FCPA enforcement action against Telefônica Brasil for the amount of $4.125 million. The matter was resolved via a Cease and Desist Order (Order). There was no information presented in the Order which indicated that Telefônica Brasil self-disclosed the matter, or in the SEC Press Release announcing the enforcement action.

The FCPA violations turned on the company’s purchase of some 1860 World Cup tickets for the 2014 World Cup. These tickets were purchased for a total amount of $5.1 million and paid in three installments over three years beginning in 2012. The tickets were valued at $2750 per ticket with an additional $454 allotted for hospitality for a total value of $3204 for each ticket handed out. Of these 1860 tickets some 194 were allotted to Brazilian government officials or officials from other governments who were customers of the company. The SEC valued the total amount allotted to Brazilian government officials as $621,576.

There was a business justification noted in the Order, which was overseen and approved by a senior management oversight committee. However, the Order ominously noted, “The paperwork seeking internal approval to purchase these tickets included no mention of giving tickets to government officials. However, it was known within the company that some of the tickets would be given to government officials.”

The 194 tickets were distributed out by the company’s Institutional Relations Department (IR Dept.) Unfortunately, it was in this corporate department, which was apparently charged with maintaining good government relationships, where the compliance breakdowns occurred. Some of these breakdowns were demonstrated by the following language, cited in the Order:

  • Management looked at the possible benefit to the company and at opportunities to build relationships with important officials.
  • An IR Dept. Manager noted in an internal Memo creating the lists of suggested guests, he took “into account the importance of the actions that each guest has already effectively done in our favor.” The employee then suggested that certain government officials be given tickets and outlined their roles in the Brazilian government. Among other examples.
  • An IR Dept. employee requested from an IR Manager a ticket for a federal legislator’s chief of staff who “has opened many doors for us” and noted that there was further legislative activity “going through the House and I will need his help.”
  • Other June 2014 emails reflect that a free trade tax zone official responsible for providing customs clearances was given a ticket and asked for his “ongoing support” in receiving a customs clearance for a particular invoice.
  • A July 2014 email between IR Dept. employees suggested inviting two Brazilian mayors but only if, during the telephone calls inviting them, the IT Department could raise with them certain “legislative amendments” of importance to the company.

In addition to the World Cup tickets, the same plans were afoot around Confederations’ Cup tickets. The Order noted that “In March and April 2013, Telefônica Brasil paid a FIFA vendor $428,219 for 240 tickets for the Confederations Cup which amounted to an average cost per ticket of approximately $1,784. Telefônica Brasil also paid $312,226 for hospitality related to the Confederations Cup. Taking both the cost of the tickets and hospitality into account, the average cost per guest for the Confederations Cup amounted to approximately $3,085. As with the World Cup, the company allocated these tickets to its various departments, including approximately 15 percent to the IR Department.” The company “primarily through the IR Department, gave a total of 38 Confederations Cup tickets to 34 government officials. The total value of tickets and related hospitality given to these government officials amounted to $117,230. Confederations Cup tickets were given to government officials who were significant to the company’s business interests, including federal congressmen and various government ministry officials.”

While Telefônica Brasil had a Code of Conduct which prevented employees from accepting gifts “which may reward or influence a business decision” it had no outward facing policy. The Order stated, “Telefônica Brasil lacked internal accounting controls sufficient to implement or maintain these policies and prevent giving things of value, like World Cup tickets, to government officials where such gifts might influence or reward an official decision. As a result, with the approval of senior managers, the company ended up offering such tickets and hospitality to government officials who were directly involved with, or in a position to influence, regulatory matters, legislation, and other business efforts of benefit to Telefônica Brasil.” Whatever the company did have in place, the Order stated, “it was not followed due to the lack of internal accounting controls, a compliance breakdown, and a deficient internal audit function.”

When it came to booking the $5.1 million in cost for the World Cup tickets and the $28,000 for the Confederations Cup tickets, the company did so in manner unacceptable under the FCPA. For the 2012 and 2013 payments for the tickets, the company booked the cost as “Publicity Institutional Events” and then booked the final installment as “Advertising and Publicity”. The Order noted both these mischaracterizations of purchase price descriptions and the hospitality given to government officials which had decision making authority over the company.

In other words, there were no or at the very least insufficient internal controls around this entire endeavor. There was no internal audit function to follow up and see if even the modicum of controls and compliance in place was being followed. Finally, the culture of the company did not appear to support a compliance effort around these World Cup and Confederation Cup ticket giveaways. Moreover, while there was no self-disclosure by Telefônica Brasil, it did appear to have been given some credit for its cooperation during the course of the internal investigation.

Tomorrow, I will use the Telefônica Brasil and the BHP Billiton FCPA enforcement action to draw out the lessons learned in creating a major sporting events policy.

 

Join me at Compliance Week 2019

 

I hope you are planning to attend the 14th Annual Compliance Week conference this year, held from May 20-22 in Washington, D.C. at the Mayflower Hotel. It is truly one of the top compliance and ethics conferences of the year. It features not only speakers from compliance, but auditors, lawyers, government regulators, and industry leaders. This year, I am leading a pre-conference workshop on Sunday afternoon about handling internal investigations and performing a root cause analysis. Monday will include keynote address from the always-popular Hui Chen, which sets the tone for speakers throughout the event. To review the full agenda, see who is speaking or to review the registration information click on the appropriate link.

 

Best of all, if you have read this blog,  you are eligible for a discount on the conference cost. Enter code “TOM300” at checkout to save $300 from your registration.

If you only attend one compliance conference in 2019, this is the event for you!

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, 2019

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