On May 20, 2015, the US Securities & Exchange Commission (SEC) settled an administrative proceeding with global mining /commodities producer BHP Billiton, resolving allegations that the company violated the books and records and internal controls provisions of the US Foreign Corrupt Practices Act (FCPA) in connection with its practice of inviting government officials and their spouses to attend the 2008 Olympics.1 Without admitting or denying the allegations, BHP Billiton agreed to pay US$25 million in civil monetary penalties, and to report on the operation of its FCPA and anti-corruption compliance program to the SEC for a one-year period.
BHP Billiton was no stranger to the world of anti-corruption investigations, having reportedly been under investigation by US and Australian authorities at multiple points since 2010. The conduct alleged in the Cease-and-Desist Order could be ripped straight from an FCPA training presentation or law school exam hypothetical. According to the SEC, BHP Billiton was an official sponsor of the 2008 Olympics in Beijing, China. In exchange for providing the raw materials for the Olympic medals, BHP Billiton received a number of hospitality packages and perks at the games. BHP Billiton sought "to strengthen relationships with key local and global stakeholders" by inviting 650 people to attend the games at the company's expense, 176 of whom were government officials and employees of state-owned enterprises. According to the SEC, the majority of these were "government officials from countries in Africa and Asia that had well-known histories of corruption."
Of the 176 officials invited, 60 ultimately attended with guests or spouses, receiving luxury hotel accommodations, sightseeing trips and event tickets provided by the company. Some also received business class airfare. Each package was valued between about US$12,000 and US$16,000. While the SEC did not allege that the hospitality resulted in BHP Billiton securing any improper business advantages, or that the company otherwise acted with corrupt intent in providing these personal benefits to the government officials, according to the SEC, various business units of BHP Billiton did have direct contracts and other matters pending before some of the attendees.
Instead of charging a violation of the anti-bribery provisions of the FCPA (which would have required a sufficient US jurisdictional nexus that may not have existed as a factual matter), the SEC alleged that BHP Billiton, a US issuer, recognized that inviting government officials to attend the Olympic games could violate anti-corruption laws and the company's own code of ethics, and yet it (1) failed to adopt sufficient internal controls to prevent such violations, and (2) maintained internal books and records that did not, in reasonable detail, accurately and fairly reflect that at the time it extended the invitations to government officials, BHP Billiton had pending negotiations or ongoing business dealings with some of the invitees. The controls that BHP Billiton did adopt, along with the shortcomings in those controls identified by the SEC, are useful to consider as you assess your company's own controls around hospitality and sponsorships.
BHP Billiton's controls
After identifying the corruption risk created by its Olympic hospitality program, BHP Billiton implemented a hospitality application process, requiring its business personnel to answer a series of pointed questions about the proposed invitees, including whether they were in a position to influence the outcome of any pending or anticipated business decisions and whether the hospitality might create the impression of an improper connection to any business decision. The cover sheet to the form briefly described the anti-bribery provisions of the Company's Guide to Business Conduct and referred employees to the section of the Guide concerning travel, entertainment and gifts. BHP Billiton even created an "Ethics Panel," staffed by compliance and legal personnel, to respond to business inquiries about the hospitality forms. Sounds pretty good, right?
Where the controls fell short in the eyes of the SEC, however, was in the follow-up. First, the company did not require all the completed applications to be reviewed by the Ethics Panel. Instead, the Ethics Panel had a purely "advisory" role and only reviewed a handful of forms including questions from the business. Second, a number of the forms were only partially completed, or were completed incorrectly. Third, the company failed to train its employees on how to complete the forms or how to apply its compliance policies to the invitations to government officials. Fourth, the company did not require the forms to be updated if circumstances changed prior to the Olympics, such as new business being pursued from the invitee. Fifth, the company had no process to verify whether a proposed invitee from one arm of the business might have pending business with another arm of the company.
According to the SEC, these deficiencies resulted in BHP Billiton "invit[ing] a number of government officials who were directly involved with, or in a position to influence, pending negotiations, efforts by [the Company] to obtain access rights, or other pending matters." For example, in mid-2007, BHP Billiton's MinEx group submitted a hospitality application form for an unidentified Burundi Minister of Mines and his spouse. At the time, BHP Billiton was not in negotiations with the Minister of Mines, so the application form contained a statement to that effect. However, BHP Billiton had a joint venture in Burundi with an entity that was in danger of losing a nickel exploration permit unless it made a large financial investment in the project or could negotiate a renewal/amendment of the exploration permit. In Burundi, the Minister of Mines was responsible for reviewing renewal and amendment applications for such permits, and later in 2007 and early 2008, BHP Billiton did negotiate directly with this Minister regarding the permit. Thereafter, however, the hospitality application was not updated or re-reviewed. The Burundi Minister of Mines and his wife attended the Olympics as BHP Billiton's guest for four days. The SEC cited this and other examples from the Philippines, the Democratic Republic of the Congo and the Republic of Guinea to demonstrate the insufficiency of the company's internal controls and to establish the inaccuracy of corporate books and records.
Implications for your sponsorship/hospitality program
While US$25 million may not sound like a record-breaking penalty in the world of FCPA enforcement actions, it is actually believed to be the largest based solely on internal controls or books and records violations. Dollars aside, there are some valuable lessons to be learned from this enforcement action regarding corporate hospitality and sponsorship programs:
- High risk expenditures should be reviewed by independent compliance officers or lawyers: While lawyers and compliance officers love to cite the adage "the business owns the risk," the BHP Billiton action underscores the importance of having riskier transactions reviewed by an independent Legal or Compliance Department, with both a critical eye and an eye on potential enterprise-wide (rather than business line-specific) risk. A "check the box" form to be completed by the business will not cut it. No doubt this places a heavy burden on Legal/Compliance, who can only offer advice based on the facts presented to them by the business. But it is critical to establish a protocol whereby independent compliance/legal experts are sufficiently "looped in" to the decision making so that they may pose the right questions to the right people.
- Don't "set it and forget it": Internal compliance forms, such as BHP Billiton's hospitality applications, which have become a cornerstone of many global compliance programs, are corporate books and records, and as such, must be (a) properly filled out and (b) appropriately updated. Be mindful that where there is lag time between a sponsorship or hospitality request/approval and the event itself, it may be prudent—particularly when government officials are involved—to affirmatively verify that there has been no change in circumstances that might affect the approval.
- There's no substitute for good training: Compliance policies are only as effective as the training that accompanies them. Even though BHP's Guide to Business Conduct included a "case example" highlighting the risk of paying travel expenses for a government official's spouse, that did not stop the business from offering luxury travel packages to many spouses of government officials. Perhaps more rigorous training would have prevented this.
Does cooperation and remediation pay off?
In addition to providing important takeaways to consider as you proactively review your compliance program, the BHP Billiton Cease-and-Desist Order also demonstrates that should an FCPA problem arise, meaningful cooperation with the government, coupled with timely remediation, may indeed, as the SEC has repeatedly proffered, result in reduced penalties. As highlighted by the SEC, some of the things a business can do to provide meaningful cooperation, all of which it credited BHP Billiton with doing, are: (1) retaining outside counsel to conduct an internal investigation and report its findings to the government; (2) voluntarily producing business, financial and accounting documents from around the world and (3) voluntarily producing translations of key documents.
The remedial actions taken by BHP Billiton can be implemented at any company seeking to enhance its compliance culture, whether under government investigation or not, and include: (1) creating a compliance group wholly independent from the business units; (2) embedding independent anti-corruption managers into the business; (3) enhancing financial and auditing controls, including policies on how to conduct business in high-risk markets; (4) conducting extensive anti-corruption training for employees; (5) overhauling the processes for internal investigations and (6) reviewing and enhancing policies and procedures concerning hospitality, gift giving, use of third-party agents, business partners and other high-risk compliance areas.
The SEC's enforcement action against BHP Billiton should serve as a warning that to avoid violating the FCPA in connection with the high-risk practice of sponsoring travel by government officials and their guests, reliance on business must be tempered, tested and confirmed by independent legal or compliance professionals. At the same time, policies designed to mitigate corruption risk should not lay dormant on the shelves collecting dust; companies must regularly train the business on how to identify potential issues and when to seek guidance from Compliance and Legal.