Internal Controls of Olympic Proportions: BHP Billiton Settles SEC Investigation of Olympic Hospitality When is it acceptable to invite foreign officials to a marquee hospitality event such as the Olympics or the World Cup? What internal controls should a company put in place in determining who specifically should be invited? These two questions arose anew this month, when, after a six-year investigation into one such event,1 the Securities and Exchange Commission (“SEC”) settled an administrative proceeding with BHP Billiton Ltd. and BHP Billiton Plc. (collectively “BHPB”), relating to BHPB’s corporate hospitality at the 2008 Beijing Olympics.2 Also in this issue: 11 Spain Adopts New Compliance Defense 19 Victories for UK Law Enforcement in Corruption and Fraud Cases Click here for an index of all FCPA Update articles If there are additional individuals within your organization who would like to receive FCPA Update, please email firstname.lastname@example.org or email@example.com 1. BHP Billiton, “BHP Billiton Announces End of US Investigations,” (May 20, 2015) (hereinafter, “BHPB Press Release”), http://www.bhpbilliton.com/home/investors/news/Pages/Articles/BHP-BillitonAnnounces-End-of-US-Investigations.aspx. 2. SEC Exchange Act Release No. 74998; In the Matter of BHP Billiton Ltd. and BHP Billiton Plc, (May 20, 2015) (hereinafter, “Cease-and-Desist Order”), http://www.sec.gov/litigation/admin/2015/34-74998.pdf. Continued on page 2 www.debevoise.com FCPA Update 2 May 2015 Volume 6 Number 10 The Cease-and-Desist Order arising from that settlement does not answer the first question and arguably suggests that stringent controls are required in response to the second. Continuing a recent trend, the SEC brought an administrative action in the absence of any Department of Justice (“DOJ”) action. And, also continuing a trend, the Cease-and-Desist Order does not allege any violation of the anti-bribery provisions of the FCPA, but rather sets out alleged violations of the books and records and internal controls provisions.3 BHPB neither admitted nor denied the facts set forth in the Cease-and-Desist Order, but it did agree to pay a $25 million civil penalty, and undertook a one-year self-reporting obligation.4 Although the BHPB settlement involves a smaller penalty than some other recent resolutions, it may well turn out to be one of the more notable FCPA resolutions in several years. This is because the case addresses issues of recurring concern to multinational corporations that have long been sought out as sponsors of – or, at least, purchasers of hospitality packages for – marquee sporting events. As good corporate citizens, these firms have come to view the purchase of tickets and hospitality packages as part of the collaboration with host entities managing such events, including national governments. This is an integral element of brand management and corporate strategy. In the course of such collaboration, these companies also receive due credit for making the event a successful interlude during which governments, business, and society at large, pause to celebrate the endeavor of sport. Yet the very process of supporting such an event leads to the inevitable question of “whom may we invite?” From there, the issue of anti-bribery compliance becomes a central issue for in-house compliance personnel. The BHPB resolution likely will lead U.S. issuers choosing to provide hospitality of this kind to expend significant additional time, resources, and money devising and maintaining controls suggested by the resolution. Even though the settlement lacks the force of law, it will no doubt raise considerable pressure on companies to exercise even greater care if inviting foreign officials to such events, and may cause some firms subject to the books and records and internal controls provisions of the FCPA, i.e., those subject to SEC jurisdiction, to reconsider altogether this practice. But to those who would read the resolution as draconian, on inspection several key facts likely animated this resolution, including the high-risk practice of inviting and paying for hospitality for spouses of foreign officials, and, in addition, inviting officials in a position to grant, refuse, or influence business at roughly the same time they received a free trip not clearly within the FCPA’s affirmative “educational Internal Controls of Olympic Proportions: BHP Billiton Settles SEC Investigation of Olympic Hospitality Continued from page 1 3. Id. at ¶¶ 36-38. 4. BHPB is continuing to cooperate with an investigation by the Australian Federal Police, announced in 2013. BHPB Press Release. Continued on page 3 www.debevoise.com FCPA Update 3 May 2015 Volume 6 Number 10 Internal Controls of Olympic Proportions: BHP Billiton Settles SEC Investigation of Olympic Hospitality Continued from page 2 expense” defense. These features thus appear to have driven the SEC’s unusually close review of BHPB’s actions. In addition, although BHPB implemented various internal controls surrounding its Olympics hospitality program, the Cease-andDesist Order recounts ways in which the SEC nevertheless viewed those as falling short. In this article, we address how the BHPB matter fits within the larger context of gift, travel, and hospitality-related expenditures and their treatment under the FCPA and other anti-bribery laws such as the UK Bribery Act 2010. The bottom line for compliance professionals and in-house counsel is that – despite statements by enforcement officials that the issues of greatest concern to them are those arising out of the “big bribe” – travel, hospitality, and entertainment remain front and center in many cases and, particularly for the SEC, can provide the basis for substantial settlements. Yet, with adequate planning and understanding of the law and how regulators are likely to approach future cases, it should be possible for companies to provide hospitality to marquee events with appropriate internal controls. Background and Analysis BHPB was an official sponsor of the Beijing Olympics, and as a result received the rights to use the Olympic trademark and priority access to tickets, hospitality suites, and accommodations in Beijing during the 2008 Olympics.5 As have other sponsors of similar events, BHPB sought to use its access to the Beijing Olympics “to reinforce and develop relationships with key stakeholders,” by inviting officers and employees of customers, suppliers, government, and members of the media to the Olympics.6 Approximately one-fourth of the 650 representatives of stakeholders BHPB invited to the Olympics were foreign government officials (including ministers and governors) and employees of state-owned enterprises.7 “The bottom line for compliance professionals and in-house counsel is that – despite statements by enforcement officials that the issues of greatest concern to them are those arising out of the ‘big bribe’ – travel, hospitality, and entertainment remain front and center in many cases and, particularly for the SEC, can provide the basis for substantial settlements.” 5. Cease-and-Desist Order at ¶ 8. 6. Id. at ¶ 10. 7. Id. at ¶¶ 15, 26-34. Continued on page 4 www.debevoise.com FCPA Update 4 May 2015 Volume 6 Number 10 8. Id. at ¶ 11. 9. See Bruce E. Yannett, Sean Hecker, Steven S. Michaels, and Noelle Grohmann Duarte, “Corrupt Intent, Relationship Building, and Quid Pro Quo Bribery: Recent Domestic Bribery Cases,” FCPA Update, Vol. 3, No. 2 (Sept. 2011), http://www.debevoise.com/insights?tab=Search%20 Insights&keyword=FCPA%20Update. 10. See DOJ, A Resource Guide to the U.S. Foreign Corrupt Practices Act 13-15 (2012) (hereinafter, “Resource Guide”), http://www.justice.gov/ criminal/fraud/fcpa/guidance/. 11. Such a principle inheres in the requirement of “corrupt intent.” See id. at 13-14. See also id. at 17 (discussing examples). The guidance by the UK Ministry of Justice relating to the Bribery Act 2010, certainly one of the world’s most stringent cross-border anti-bribery law, states: “Bona fide hospitality . . . which seeks to improve the image of a commercial organisation . . . or establish cordial relations, is recognised as an established and important part of doing business.” UK Ministry of Justice, The Bribery Act 2010 Guidance (Mar. 2011) at ¶ 26. 12. Resource Guide, note 10, supra, at 13-17. The main and sometimes sole business purpose of such “marquee events” is relationship building.8 This is not per se an illegitimate business purpose, as has been held in any number of U.S. court decisions that carve from the prohibitions of antibribery laws “relationship building” that does not involve quid pro quo transactions.9 Yet, to appreciate the nature of the “relationship building” exception to prohibited practices under U.S. anti-bribery law, it is imperative to understand the government’s baseline assumption, stated succinctly in the 2012 FCPA Resource Guide, that “[t]he larger or more extravagant the gift, . . . the more likely it was given with an improper purpose.”10 For U.S. regulators, gift, travel, and hospitality analysis is also properly animated, at least implicitly, by a principle of proportionality that takes into account the income and stature of the public official at issue, permitting higher gift, travel, and hospitality expenditures for those on whom such spending is less likely to have an influence.11 A third factor considered in FCPA analysis is the benefit of transparency. Thus, “hallmarks of appropriate gift-giving [include] 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.”12 These competing considerations and what they mean in the context of Olympics or World Cup hospitality present somewhat vexing issues. On the one hand, there is efficiency and, indeed, transparency in providing hospitality at such public events, in that they allow senior executives of multinational companies to maintain relationships with key stakeholders scattered throughout the world. Indeed, conducted in accordance with best practices, a business leader’s sitting side-byside with a foreign official guest at a public sporting event, taking time to share experience and learn what is legitimately important to winning business, is one of a number of transparent ways relationship-building may appropriately take place. Yet, at the same time, the very things that make marquee events both enticing and also open gathering places is one reason hospitality for such events, including tickets, the provision of airfare (including business class travel for long journeys), Internal Controls of Olympic Proportions: BHP Billiton Settles SEC Investigation of Olympic Hospitality Continued from page 3 Continued on page 5 www.debevoise.com FCPA Update 5 May 2015 Volume 6 Number 10 13. Cease-and-Desist Order at ¶ 11. 14. Id. at ¶¶ 2, 15. 15. Id. at ¶ 18. 16. Id. 17. Id. at ¶ 20. and accommodations, is expensive. In the case of BHPB, the cost was $12,000 to $16,000 per participant, not including airfare.13 And, while the SEC did not charge BHPB with FCPA anti-bribery violations, it noted two key facts that appear to have driven the agency’s concern: (1) payments for attendance by spouses and (2) payments to foreign officials to support their attendance at Olympic events at the very time BHPB had pending business before those officials or others over whom they may have had influence.14 In its resolution with BHPB, the SEC did not formally focus on these aggravating factors, although they were mentioned in the agency’s press release and discussed in the appended stipulated Cease-and-Desist Order. And, as is typical in SECnegotiated resolutions in which there is no primary anti-bribery charge, the agency phrased the nature of BHPB’s deficiencies as failures of internal control as well as violations of the books and records provisions of the FCPA. In so doing, the SEC left open the possibility that, with greater control, and with sufficient facts and analysis, even spending of the kind BHPB engaged in might be appropriate. While that is the positive news for firms seeking flexibility in this area, the resolution also leaves many questions unanswered, most particularly how exactly companies should substantively weigh the various risks involved in marquee event hospitality. BHPB, as the SEC stipulated, recognized the bribery risks inherent in Olympic hospitality and created a detailed program to address them. An important part of that program was a multi-question survey that was required to be filled out by BHPB employees for each invitee. The survey form came with a cover memorandum referencing the company’s anti-bribery policy provisions and urging employees to consult BHPB’s Guide to Business Conduct.15 It included questions relating to existing or expected business with the invitee, asked whether there was a specific transaction which the invitee might be in a position to influence, whether the invitation could create the appearance of impropriety, and whether, with regard to BHPB’s Guide to Business Conduct, the employee believed that other matters should be considered before tendering the invitation. After it was filled out by an employee, each questionnaire had to be approved by the relevant BHPB group or country President.16 BHPB also established an Ethics Panel to provide employees advice.17 Internal Controls of Olympic Proportions: BHP Billiton Settles SEC Investigation of Olympic Hospitality Continued from page 4 Continued on page 6 www.debevoise.com FCPA Update 6 May 2015 Volume 6 Number 10 18. Id. at ¶ 18. 19. Id. at ¶ 19. 20. Id. at ¶ 21. 21. Id. at ¶ 22. 22. Id. at ¶ 23. 23. Id. at ¶ 24. 24. 15 U.S.C. § 78m. 25. Cease-and-Desist Order at ¶¶ 21, 38. The SEC nevertheless identified five reasons why these controls “did not adequately address the anti-bribery risks associated with offering expensive travel and entertainment packages to government officials:”18 • First, there was no independent legal or compliance review of the hospitality applications outside of the business group submitting the invitation;19 • Second, some applications were inaccurate or incomplete, while others used examples of answers provided by BHPB rather than an individualized description of the facts;20 • Third, BHPB “did not provide its employees and executives with any specific training on how to fill out the hospitality forms or how to evaluate whether an invitation to a government official complied with” its Guide to Business Conduct;21 • Fourth, BHPB did not institute a procedure for updating or reconsidering the hospitality applications if circumstances changed; 22 and • Fifth, hospitality applications were filled out by individual groups within BHPB and, apart from circulating the invitee list to senior managers, there was no process to determine whether the invitee also had business with another company group.23 The SEC helpfully listed improvements in internal controls it believed were required. Some of these, however, particularly the second and third, will be potentially costly to implement and suggest the agency, at least as far as marquee hospitality for foreign officials is concerned, takes an aggressive view of the “reasonable assurances” language of the accounting provisions of the statute.24 The Cease-and-Desist Order implies that, having implemented a specific control (namely, the invitation application), BHPB nevertheless implemented that control deficiently because “some applications were inaccurate or incomplete”; the SEC, relatedly, charged a books and records violation because there were errors in “certain Olympic hospitality applications.”25 Internal Controls of Olympic Proportions: BHP Billiton Settles SEC Investigation of Olympic Hospitality Continued from page 5 Continued on page 7 www.debevoise.com FCPA Update 7 May 2015 Volume 6 Number 10 26. SEC Press Rel. 2015-93, SEC Charges BHP Billiton With Violating FCPA at Olympic Games (May 20, 2015), http://www.sec.gov/news/ pressrelease/2015-93.html. 27. Cease-and-Desist Order at ¶ 21, n.4. Beyond the point that the FCPA does not require flawless controls or perfect records, this aspect of the resolution detracts from the fact that, as noted, BHPB had engaged in conduct, such as inviting and paying for spouses of foreign officials without special justification, and, more generally, inviting officials before whom the company had pending business, which are points of genuine risk. Yet in focusing on the procedural compliance issues of accuracy and completeness, the resolution runs the risk of promoting the very “‘check the box’ compliance approach” that the agency criticized in its press release announcing the settlement of the investigation.26 The implied requirement that companies that engage in marquee event hospitality must provide greater detail than did BHPB in the contemporaneous business rationale statements that formed the basis for approving foreign official travel and entertainment expense may also prove potentially costly and time-consuming. For example, the agency singled out the following business rationale as being insufficiently specific in identifying a proper purpose for the marquee spending: Yes, the invitee is in a position to influence the outcome of the pending contract, however, this is an organization that we have been conducting business with for over five years. Negotiations and contract outcomes are a regular occurrence but due to the lengthy relationship with BHP Billiton there is evidence [of] a long term commitment that would not necessarily be influenced by this gesture. It is a way of rewarding the business that has previously been conducted with BHP Billiton.27 Internal Controls of Olympic Proportions: BHP Billiton Settles SEC Investigation of Olympic Hospitality Continued from page 6 “The implied requirement that companies that engage in marquee event hospitality must provide greater detail than did BHPB in the contemporaneous business rationale statements that formed the basis for approving foreign official travel and entertainment expense may also prove potentially costly and time-consuming.” Continued on page 8 www.debevoise.com FCPA Update 8 May 2015 Volume 6 Number 10 While the quoted text appears to be a reasonable answer that addresses considerations that would reduce the risk of bribery and make hospitality permissible, the SEC may have intended to suggest that this scenario created the risk that the conferral of a benefit as a “reward” for past business could be an implied signal that future rewards would be forthcoming if future business was secured. But the FCPA is not an anti-gratuity statute. And as the Cease-and-Desist order is framed, it is not clear why the SEC opposed this rationale for the travel. The Ceaseand-Desist Order does not state why the rationale was inappropriate or provide guidance on how much more specific the answer should have been. Is a recitation of all past business dealings required? Would a comparison of the size of the pending contract to past contracts have helped? If the issue was not lack of specificity, but what was said in the documentation, the BHPB case will be received as a genuine missed opportunity for the SEC to state its true concerns, specifically as to the issue of paying for relationship-building entertainment during the period in which government business decisions are pending, and whether and under what circumstances such entertainment – as opposed to educational-related travel such as business site visits while a contract with the government is pending, for example – is ever permissible in the eyes of the SEC. For now, companies may seek to take some comfort in the lack of primary anti-bribery charges in this resolution for conduct related to these forms of benefits. Similarly, the SEC’s third noted deficiency of not providing “specific training on how to fill out hospitality forms or how to evaluate [the invitations],” appears to reflect a new requirement. The 2012 Resource Guide identified “Hallmarks of an Effective Compliance Program,” which include, in relevant part, “periodic training.”28 BHPB provided “generalized training” to employees.29 In addition, the hospitality questionnaire to employees was accompanied by a memorandum restating BHBP’s anti-bribery rules and urging employees to review the Guide to Business Conduct. 28. See Resource Guide, note 10, supra, at 59. 29. Cease-and-Desist Order at ¶ 22. Internal Controls of Olympic Proportions: BHP Billiton Settles SEC Investigation of Olympic Hospitality Continued from page 7 Continued on page 9 “Because of the ambiguities in the BHPB settlement, issuers will now inevitably need to exercise even greater caution when inviting ‘foreign officials’ (including employees of state-owned enterprises) to events like this one.” www.debevoise.com FCPA Update 9 May 2015 Volume 6 Number 10 That document included an example of a minister who requested travel in exchange for favorable treatment and set forth the rule that “you must not offer to provide anything that could be reasonably regarded as an attempt to unduly influence the Minister’s decision.”30 Again, although the SEC’s stated concern was lack of specificity in training, the lack of guidance in the SEC’s order as to what the training should have entailed suggests that the agency’s real concern was the substance of the event, not the process that led to it. Had the agency taken that view, the issue of major-event hospitality would have been joined in clear way, and could have provided courts (in subsequent litigated cases) and Congress the chance to clarify or change the law if they disagreed. Conclusion As in all settled FCPA matters, the terms of the BHPB resolution are the product of negotiation designed to serve the immediate interests of the parties in resolving a pending matter, and not the broader interest in definitively clarifying the law. And, at the end of the day, and after years of investigation, this particular resolution appeared to have yielded, at most, violations of lower severity than those that have led to larger settlements. It is notable that the Cease-and-Desist Order identified only four individuals out of 176 “foreign officials” invited to the Olympics who were involved with or in a position to influence pending matters involving BHPB. Of those four, only one official attended the Olympics. In these circumstances, it is no surprise that the DOJ did not take action. But even for one of the smaller FCPA cases on its docket, the SEC could have provided more useful guidance in a compliance area where government officials and the courts alike (the latter at least in domestic bribery cases) have long stated that companies should have substantial leeway – provided that no quid pro quo arrangements inhere.31 Because of the ambiguities in the BHPB settlement, issuers will now inevitably need to exercise even greater caution when inviting “foreign officials” (including employees of state-owned enterprises) to events like this one. 30. Id. 31. The Cease-and-Desist Order does not address one internal control that many companies require in connection with marquee events and potential conflicts of interest: transparency. The Cease-and-Desist Order contains an example of an official whose invitation was rescinded because “BHPB became concerned that [a counter-party in a dispute] had learned about the Olympics invitation,” suggesting that the invitations were not publicized, but it does not address whether the relevant governments were informed. Id. at ¶ 30. Internal Controls of Olympic Proportions: BHP Billiton Settles SEC Investigation of Olympic Hospitality Continued from page 8 Continued on page 10 www.debevoise.com FCPA Update 10 May 2015 Volume 6 Number 10 The Cease-and-Desist Order may not have found this practice to violate the FCPA’s anti-bribery provisions. But the SEC has set a high bar for any company extending hospitality to foreign officials in terms of necessary internal controls, requiring independent review of almost every decision, potentially exacting accuracy and specificity for documentation, special training, and other procedures. Andrew M. Levine Bruce E. Yannett Matthew Getz Steven S. Michaels Philip Rohlik Andrew M. Levine and Bruce E. Yannett are partners, and Steven S. Michaels is a counsel, in the New York office. Matthew Getz and Philip Rohlik are international counsel in the London and Shanghai offices, respectively. They are members of the Litigation Department and the White Collar Litigation Practice Group. The authors may be reached at firstname.lastname@example.org, email@example.com, firstname.lastname@example.org, email@example.com, and firstname.lastname@example.org. Full contact details for each author are available at www.debevoise.com.