Anti-Corruption Update: Naughty or Nice? When Giving Gifts Will Get You a Lump of Coal from the...

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Anti-Corruption Update: Naughty or Nice?? When Giving Gifts Will Get You a Lump of Coal from the Government

December 17, 2013


Chelsie ChmelaEvents Manager [email protected]

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Nathaniel EdmondsPartner, Paul Hastings

David YawmanChief Compliance & Ethics Officer, PepsiCo

SPEAKING TODAY

www.paulhastings.com ©2013 Paul Hastings LLP 5

PART I

The Current Environment


The Current Environment

The World Bank estimates that there are over $1 trillion in bribes paid every year – 3% of the world economy.– Over $2.5 billion in bribes every day or over $100 million in bribes

every hour.

Corruption issues arise in nearly every stage of an international business: not only when obtaining contracts, but corruption identified in every type of interaction with government officials, including tax disputes, licensing and permitting, real estate transactions and customs clearances.

According to the recent Transparency International Global Corruption Barometer, over 1 in 4 people (27%) acknowledged paying a bribe in the last year.

Corruption issues have been found in nearly every industry and geography, but certain areas have higher risks.


Corruption Perception Index - 2013


PART II

The Rules: The US Foreign Corrupt Practices Act


The U.S. Foreign Corrupt Practices Act of 1977 (FCPA) prohibits U.S. businesses and citizens from making “corrupt” payments to foreign officials. (Anti-bribery Provisions)

FCPA also requires publicly traded companies (US issuers) to maintain certain recordkeeping and accounting practices to prevent corporate “slush funds” that finance such payments. (Accounting Provisions)

“The FCPA does not prohibit gift-giving. Rather, just like its domestic bribery counterparts, the FCPA prohibits the payments of bribes, including those disguised as gifts.”

The Rules: The US Foreign Corrupt Practices Act

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The Rules: The Reach of the FCPA

U.S. Issuers (publicly traded companies) Domestic Person or Concern (U.S. citizens, companies,

partnerships, etc) Territorial Jurisdiction: Any foreign person or concern if:

– Takes an act, while in the territory of the United States, in furtherance of an improper payment

• Has been interpreted to include foreign activity, if the activity causes an act in the United States in furtherance of an improper payment

• Includes sending faxes or emails; bank transfers originating or terminating in the United States; bank transfers between foreign accounts conducted in U.S. dollars if it touches a U.S. correspondent bank account

Accounting Provisions – Only applies to Issuers, and employees, officers and agents of issuers– False books and records– Failure to implement internal controls or evasion of internal controls

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The Rules: Key Elements of FCPA Bribery Violation

Offer, promise, payment, or authorization to pay money or anything of value corruptly

To:– Non-U.S. official, public international organization, political party,

official or candidate, OR– Any third person with knowledge that all or a portion will be paid to

any of the above For the purpose of:

– Influencing an official act– Inducing a violation of a lawful duty– Inducing official use of influence– Securing any improper advantage

In order to obtain or retain or direct business

*Note: All elements are broadly interpreted by the DOJ and SEC

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Overview of the FCPA Resource Guide

The FCPA Resource Guide was released November 14, 2012, and was drafted by U.S. Department of Justice Criminal Division and U.S. Securities and Exchange Commission – Division of Enforcement

– Available at http://www.justice.gov/criminal/fraud/fcpa/guidance/

Originated from request by Organization of Economic Cooperation and Development’s Working Group on Bribery to provide additional guidance to companies subject to the FCPA in order to assist companies to prevent improper payments.

Content was refined from numerous discussions with various interest groups, including U.S. Chamber of Commerce, representatives of multinational businesses, representatives of small and mid-sized businesses, corporate compliance counsel, white collar defense lawyers, and investor groups.

Goal is to serve three principal purposes:

– Outline the Government’s interpretation of the law as exemplified by past enforcement actions;

– Provide insight into the Government’s enforcement priorities; and

– Give a tangible and concrete understanding of how the Government exercises its discretion.

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http://www.justice.gov/criminal/fraud/fcpa/guidance/

http://www.justice.gov/criminal/fraud/fcpa/guidance/


The Rules: Who is a Foreign Official?

“When a foreign government is organized in a fashion similar to the U.S. system, what constitutes a government department or agency is typically clear (e.g., a ministry of energy, national security agency, or transportation authority). However, governments can be organized in very different ways. Many operate through state-owned and state-controlled entities, particularly in such areas as aerospace and defense manufacturing, banking and finance, healthcare and life sciences, energy and extractive industries, telecommunications, and transportation. By including officers or employees of agencies and instrumentalities within the definition of ‘foreign official,’ the FCPA accounts for this variability.”

(FCPA Guide p. 20)

“[T]he FCPA broadly applies to corrupt payments to ‘any’ officer or employee of a foreign government and to those acting on the foreign government’s behalf. The FCPA thus covers corrupt payments to low-ranking employees and high-level officials alike.”

(FCPA Guide p. 20)13


The Rules: Any “Thing of Value”

While cash is obvious, any gift can be a “thing of value”

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The Rules: The FCPA Guide on Gifts, Travel & Entertainment

Gift giving can be appropriate in numerous circumstances “A small gift or token of esteem or gratitude is often an appropriate way

for business people to display respect for each other.” FCPA Guide p. 15

Enforcement of the FCPA should not cause companies to prohibit gifts, travel, or entertainment outright, but only to prohibit “corrupt” provision of gifts that are designed to “improperly influence” “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.”

FCPA Guide p. 15

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The Rules: The FCPA Guide on Gifts, Travel & Entertainment, cont.

Liability does not depend on the amount, but on the intent of the giver– “Regardless of size, for a gift or other payment to violate the

statute, the payor must have corrupt intent—that is, the intent to improperly influence the government official. The corrupt intent requirement protects companies that engage in the ordinary and legitimate promotion of their businesses while targeting conduct that seeks to improperly induce officials into misusing their positions.” (FCPA Guide p. 15)

– “The FCPA does not prohibit gift-giving. Rather, just like its domestic bribery counterparts, the FCPA prohibits the payment of bribes, including those disguised as gifts.” (FCPA Guide p. 16)

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Hallmarks of appropriate gift-giving (FCPA Guide page 15)

1. Open and transparent

2. Properly recorded in books and records

3. Reflect esteem or gratitude

4. Permitted under local law If an appropriate business purpose exists, modest dinners,

appropriate gifts and tickets to an entertainment would not violate the FCPA

Business travel is okay, but vacations are not

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Also keep in mind promotional expenses– “DOJ and SEC have consistently recognized that businesses, both foreign and

domestic, are permitted to pay for reasonable expenses associated with the promotion of their products and services or the execution of existing contracts. . . . DOJ [has] opined that the following types of expenditures on behalf of foreign officials did not warrant FCPA enforcement action:

• travel and expenses to visit company facilities or operations;• travel and expenses for training; and• product demonstration or promotional activities, including travel and

expenses for meetings. Whether any particular payment is a bona fide.”

Legitimate promotional expenditures must be:– Bona fide– Reasonable– AND directly related to the:

• Promotion, demonstration, or explanation of products or services, or • Execution or performance of a contract with a non-U.S. government or

agency

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Key In Designing FCPA Compliance Program—Risk-Based and Proportionate Policies and Controls

“Devoting a disproportionate amount of time policing modest entertainment and gift-giving instead of focusing on large government bids, questionable payments to third-party consultants, or excessive discounts to resellers and distributors may indicate that a company’s compliance program is ineffective.”

FCPA Guide p. 58

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PART III

Enforcement Actions Involving Gifts, Travel & Entertainment


Enforcement Actions: Overview

While many enforcement resolutions involve gifts, travel and entertainment wrongdoing, issues of gifts and business courtesies have never served as the sole basis for an enforcement action.

“Both the DOJ and SEC have brought cases where

[corrupt payment of gifts, travel and entertainment expenses] occurred in conjunction with other conduct reflecting systemic bribery or other clear indicia of corrupt intent.” (FCPA Guide p. 15)

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Enforcement Actions: Key Summaries and Examples

Diebold – Improper Trips On October 22, 2013, DOJ and SEC announced their settlements with Diebold, a

provider of ATMs and ATM-related services, which included the payment of $25.3 million in criminal penalties and the disgorgement of $22.97 million in profits and prejudgment interest.

The court documents allege that between 2005 and 2010, Diebold lavished bank officials of state-owned and controlled banks in China and Indonesia with $1.75 million in international leisure travel, entertainment, and improper gifts to secure and retain business.

Examples include:– Paid for trips for two public officials that included a 15-day leisure trip to Universal Studios

and Disneyland in Los Angeles, Los Vegas, the Grand Canyon, Washington D.C., New York City, San Francisco, and Hawaii

– Paid for trips for five officials that included a two-week leisure trip to Australia and New Zealand

– Paid for trips for eight officials that included a two-week leisure trip to Europe, including Paris, Brussels, Amsterdam, Cologne, Frankfurt, Munich, Salzburg, Vienna, Klagenfurt, Venice, Florence, and Rome.

Diebold further attempted to disguise the improper payments by making them through third parties and falsely recording them as training or other legitimate business expenses.

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Enforcement Actions: Key Summaries and Examples, cont.

Orthofix – Improper Gifts On July 10, 2012, SEC and DOJ announced its settlement of FCPA charges

with Orthofix International, N.V., a medical device manufacturer, which included penalties of $7.4 million, for violations of the FCPA that included gifts of laptops, televisions, and appliances to officials of a Mexican government-owned health care and social services provider, some of which were falsely recorded as promotional or training expenses.

Diageo – Improper Gifts On July 27, 2011, SEC announced its settlement with Diageo plc, the British

spirits company that produces Johnnie Walker and other liquors, requiring the payment of $16.37 million in profits disgorgement, penalties, and prejudgment interest.

Among other violations, gifts of rice cakes (a customary and traditional gift in Korean culture) to South Korean military officials responsible for liquor procurement, valued at $100 to $300 per recipient and roughly $64,000 total, were found to have violated the FCPA because they were specifically intended to procure a business advantage.

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PART IV

Hypotheticals


Hypotheticals (from the FCPA Guide)

Company A is a large U.S. engineering company with global operations in more than 50 countries, including a number that have a high risk of corruption, such as Foreign Country. Company A’s stock is listed on a national U.S. stock exchange. In conducting its business internationally, Company A’s officers and employees come into regular contact with foreign officials, including officials in various ministries and state-owned entities. At a trade show, Company A has a booth at which it offers free pens, hats, t-shirts, and other similar promotional items with Company A’s logo. Company A also serves free coffee, other beverages, and snacks a the booth. Some of the visitors to the booth are foreign officials. Is Company A in violation of the FCPA?

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No. These are legitimate, bona fide expenditures made in connection with the promotion, demonstration, or explanation of Company A’s products or services. There is nothing to suggest corrupt intent here. The FCPA does not prevent companies from promoting their businesses in this way or providing legitimate hospitality, including to foreign officials. Providing promotional items with the company logos or free snacks as set forth above is an appropriate means of providing hospitality and promoting business. Such conduct has never formed the basis for an FCPA enforcement action. (FCPA Guide p. 17)


Hypotheticals, cont.

At the trade show, Company A invites a dozen current and prospective customers out for drinks, and pays the moderate bar tab. Some of the current and prospective customers are foreign officials under the FCPA. Is Company A in violation of the FCPA?

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No. Again, the FCPA was not designed to prohibit all forms of hospitality to foreign officials. While the cost here may be more substantial than the beverages, snacks, and promotional items provided at the booth, and the invitees specifically selected, there is still nothing to suggest corrupt intent. (FCPA Guide p. 17)



Two years ago, Company A won a long-term contract to supply goods and services to the state-owned Electricity Commission in Foreign Country. The Electricity Commission is 100% owned, controlled, and operated by the government of Foreign Country, and employees of the Electricity Commission are subject to Foreign Country’s domestic bribery laws. Some Company A executives present a moderately priced crystal vase to the General Manager as a wedding gift as a token of esteem. Is Company A in violation of the FCPA?

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No. It is appropriate to provide reasonable gifts to foreign officials as tokens of esteem or gratitude. It is important that such gifts be made openly and transparently, properly recorded in a company’s books and records, and given only where appropriate under local law, customary where given, and reasonable to the occasion. (FCPA Guide p. 17)



During the course of the contract described above, Company A periodically provides training to Electricity Commission employees at its facilities in Michigan. The training is paid for by the Electricity Commission as part of the contract. Senior officials of the Electricity Commission inform Company A that they want to inspect the facilities and ensure that the training is working well. Company A pays for the airfare, hotel, and transportation for the Electricity Commission senior officials to travel to Michigan to inspect Company A’s facilities. Because it is a lengthy international flight, Company A agrees to pay for business class airfare, to which its own employees are entitled. The foreign officials visit Michigan for several days, during which the senior officials perform an appropriate inspection. Company A executives take the officials to a moderately priced dinner, a baseball game, and a play. Do any of these actions violate the FCPA?

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No. Neither the costs associated with training the employees nor the trip for the senior officials to the Company’s facilities in order to inspect them violates the FCPA. Reasonable and bona fide promotional expenditures do not violate the FCPA. Here, Company A is providing training to the Electricity Commission’s employees and is hosting the Electricity Commission senior officials. Their review of the execution and performance of the contract is a legitimate business purpose. Even the provision of business class airfare is reasonable under the circumstances, as are the meals and entertainment, which are only a small component of the business trip. (FCPA Guide pp. 17-18)



Would this analysis be different if Company A instead paid for the senior officials to travel first-class with their spouses for an all-expenses-paid, week-long trip to Las Vegas, where Company A has no facilities?

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Yes. This conduct almost certainly violates the FCPA because it evidences a corrupt intent. Here, the trip does not appear to be designed for any legitimate business purpose, is extravagant, includes expenses for the official’s spouses, and therefore appears to be designed to corruptly curry favor with the foreign government officials. Moreover, if the trip were booked as a legitimate business expense—such as the provision of training at its facilities—Company A would also be in violation of the FCPA’s accounting provisions. Furthermore, this conduct suggests deficiencies in Company A’s internal controls. (FCPA Guide p. 18)



Company A’s contract with Electricity Commission is going to expire, and the Electricity Commission is offering the next contract through its tender process. An employee of the Electricity Commission contacts Company A and offers to provide Company A with confidential, non-public bid information from Company A’s competitors if Company A will pay for a vacation to Paris for him and his girlfriend. Employees of Company A accede to the official’s request, pay for the vacation, receive the confidential bid information, and yet still do not win the contract. Has Company A violated the FCPA?

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Yes. Company A has provided things of value to a foreign official for the purpose of inducing the official to misuse his office and to gain an improper advantage. It does not matter that it was the foreign official who first suggested the illegal conduct or that Company A ultimately was not successful in winning the contract. This conduct would also violate the FCPA’s accounting provisions if the trip were booked as a legitimate business expense and suggests deficiencies in Company A’s internal controls. (FCPA Guide p. 18)


Conclusion

Giving gifts and providing travel and entertainment can be legal under the FCPA, provided that they are:

1. Given openly and transparently

2. Properly recorded in company’s books and records

3. Reflect esteem or gratitude

4. Permitted under local law

Gifts that are linked to requests for help from public officials or given as a reward for official action may violate the FCPA.

The FCPA prohibits bribes, including bribes disguised as gifts.

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Naughty or Nice?

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The surest way to get on the “Naughty” list…

“Devoting a disproportionate amount of time policing modest entertainment and gift-giving instead of focusing on large government bids, questionable payments to third-party consultants, or excessive discounts to resellers and distributors may indicate that a company’s compliance program is ineffective.”

FCPA Guide p. 58

Happy Holidays!!!


Questions

Nathaniel B. Edmonds

Partner, Litigation Department

Paul Hastings LLP

875 15th Street, N.W.,

Washington, DC 20005

United States of America

Direct: +1.202.551.1774

Main: +1.202.551.1700

Fax: +1.202.551.0274

[email protected]

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David Yawman

SVP, Chief Compliance & Ethics Officer

PepsiCo, Inc.

700 Anderson Hill Road

Purchase, NY 10577

Direct: +1.914.253.2212

[email protected]

mailto:[email protected]




THANK YOU

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Anti-Corruption Update: Naughty or Nice? When Giving Gifts Will Get You a Lump of Coal from the...

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