If one were to reflect upon the providing of gifts and
business entertainment to foreign governmental officials by a US Company, one
might reasonably conclude that after 30 odd years of the Foreign Corrupt
Practices Act (FCPA), US companies might follow its prescriptions regarding
gifts and business entertainment. However 2009 brought about a couple of
notable FCPA enforcement actions where one of the significant FCPA violations
was precisely in this area.
In July 2009, Control Components, Inc (CCI) pled guilty to
substantive FCPA anti-bribery charges and to conspiring to violate the FCPA.
CCI engaged in actions including rewarding customers' employees for the award
of contracts with expensive gifts and extravagant overseas holidays, to destinations
including Disneyland, Las Vegas and Hawaii, under the guise of training and
inspection trips. In addition, CCI paid the college tuition for the children of
at least two executives of CCI's customers. For the Department of Justice (DOJ)
information filed against CCI, click here.
To round out the year on December 31, 2009 UTStarcom pled
guilty to conduct which violated the FCPA which included (among other FCPA
violations):
1. Arranging and paying for travel to popular tourist
destinations in the United States, including Hawaii, Las Vegas and New York
City, when such trips were recorded as training expenses at UTStarcom
facilities. However, it is worthwhile to note that UTStarcom had no facilities
in these areas. The trips also included a cash allowance of between $800 and
$3,000 per person.
2. Spending nearly $7 million on lavish gifts and
all-expenses paid executive training programs in the US for existing and
potential foreign government customers in China and Thailand.
3. Presenting expensive gifts to, and engaging in
entertainment with, government agents such as nearly $10,000 on French wine, a
gift to agents of a government customer, and spending $13,000 on entertainment
expenses for the same customer in an attempt to secure business.
For the Non-Prosecution Agreement between the DOJ and
UTStarcom, click here.
What does the FCPA Itself Say?
Although gift and business entertainment is an area open to
vagueness under the FCPA as there are no clear guidelines in the FCPA or the
legislative history, the conduct of CCI and UTStarcom went far beyond anything
that has been previously approved or discussed in any DOJ Opinion Releases.
While prohibiting payment of any money, or thing of value, to foreign officials
to obtain or retain business, the FCPA arguably permits incurring certain
expenses on behalf of these same officials. 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. 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).
As with most matters under the FCPA, there is little direct
guidance on what conduct may step over the line set out above. Of course there
is always the gut check test, which simply measures "if it feels
wrong in your gut, it probably is wrong". It is something good to always
keep in mind in any circumstance.
Opinion Releases
Somewhat surprisingly, this commentator was not able to find
any recent DOJ Opinion Releases dealing with the values for gifts and business
entertainment under the FCPA. However, there are three Opinion Releases from
the early 1980s which can provide some guidance to current practitioners.
In Opinion Release 82-01, the DOJ approved the gift of cheese
samples made to Mexican governmental officials, by the Department of
Agriculture of the State of Missouri to promote the state of Missouri's agricultural
products. However the value of the cheese to be presented was not included in
the Opinion Release. In Opinion Release 81-02, the DOJ approved a gift of its packaged beef
products from the Iowa Beef Packers, Inc to officials from the Soviet Ministry
of Foreign Trade. The total value of all the samples presented was estimated to
be less than $2,000 and the Iowa Beef Packers, Inc averred that the individual
sample packages would not exceed $250 in value.
The final Opinion Release relating to gifts is 81-01. In this release Bechtel sought approval to use the
SGV Group, a multinational organization headquartered in the Republic of the
Philippines and comprised of separate member firms in ten Asian nations and
Saudi Arabia, which provide auditing, management consulting, project management
and tax advisory services. The SGV Group desired to solicit business on behalf
of Bechtel who had proposed to reimburse the SGV Group for gift expenses
incurred in this business solicitation. Regarding the reimbursement of gift
expenses by Bechtel to the SGV Group the DOJ stated:
(d) Expenses for gifts or tangible objects of any kind
incurred without Bechtel's prior written approval will be reimbursed only where
such expenditures are permitted under the local laws, the ceremonial value of
the item exceeds its intrinsic value, the cost of the gift does not exceed $500
per person, and the expense is commensurate with the legitimate and generally
accepted local custom for such expenses by private business persons in the
country.
Guidelines for Gifts and Business Entertainment under
the FCPA
A. Gifts to Governmental Officials
Based upon the FCPA language and relevant Opinion Releases
(81-01, 81-02 and 82-01), it would appear reasonable that a Company can provide
gifts up to a value of $250. Below are the guidelines which the Opinion
Releases would suggest incorporating into a Compliance Policy regarding gifts:
- The gift should be provided as a token of esteem, courtesy
or in return for hospitality.
- The gift should be of nominal value but in no case greater than $250.
- No gifts in cash.
- The gift shall be permitted under both local law and the guidelines of the
employer/governmental agency.
-
The gift should be a value which is customary for country involved and
appropriate for the occasion.
- The gift should be for official use rather than personal use.
- The gift should showcase the company's products or contain the company logo.
- The gift should be presented openly with complete transparency.
-
The expense for the gift should be correctly recorded on the company's books
and records.
B. Business Entertainment of Governmental Officials
Based upon FCPA language (there are no Opinion Releases on
this point), there appears to be a threshold that a Company can establish a
value for business entertainment of up to the amount of $250. However this must
be tempered with clear guidelines incorporated into the business expenditure
component of a FCPA Compliance Policy, which should include the following:
- A reasonable balance must exist for bona fide business
entertainment during an official business trip.
- All business entertainment expenses must be reasonable.
- The business entertainment expenses must be permitted under (1) local law and
(2) customer guidelines.
- The business entertainment expense must be commensurate with local custom and
practice.
- The business entertainment expense must avoid the appearance of impropriety.
-
The business entertainment expense must be supported by appropriate
documentation and properly recorded on the company's book and records.
The incorporation of these concepts into a FCPA Compliance
Policy is a good first step towards preventing potential FCPA violations from
arising, but it must be emphasized that they are only a first step. These
guidelines must be coupled with active training of all personnel, not only on a
Company's FCPA Compliance Policy, but also on the corporate and individual
consequences that may arise if the FCPA is violated regarding gifts and
business entertainment. Lastly, it is imperative that all such gifts and
business entertainment be properly recorded, as required by the books and
records component of the FCPA. One of the FCPA violations alleged against
UTStarcom was that it falsely recorded these trips as 'training' expenses,
while the true purpose for providing these trips was to obtain and retain
lucrative telecommunications contracts. All business gifts, entertainment and
expenses must be properly recorded.
And, as always, do not forget the gut check test.
For previous posting on Travel and Entertainment under the
FCPA, click here.
Visit
the FCPA Compliance and Ethics Blog, hosted by Thomas Fox, for more
commentary on FCPA compliance, indemnities and other forms of risk management
for a worldwide energy practice, tax issues faced by multi-national US
companies, insurance coverage issues and protection of trade secrets.
-------
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