FCPA awareness and enforcement has exploded since 2002, but one thing remains the same: the most vexing part of the statute for companies, in terms of day-to-day compliance, is the part covering gifts, meals, entertainment and travel expenses. Rarely a day goes by that I don’t receive a call or email from a client with a question in this area.
A casual observer might believe that a gift/travel/entertainment mistake is unlikely to result in a serious penalty. But those practicing in the area know that is not the case. A disproportionate number of enforcement matters that ultimately result in a high penalty for bribes unrelated to gifts/meals/travel/entertainment had their genesis in the discovery of inappropriate marketing or promotion expenses, which led investigators to more extensive and substantial corruption.
Companies that focus on keeping a clean house in the gifts/meals/entertainment/travel part of the FCPA statute stand a better chance of forestalling big problems elsewhere in the statute’s danger zones. Such good housekeeping sets a strong tone from the top, and it keeps small problems from going undetected until they’ve morphed into big ones.
Advising companies to keep a clean house and accomplishing that are, of course, two entirely different matters. Companies, and particularly their business people on the front lines, understandably find the FCPA’s statutory language in this area quite frustrating. The statutory language provides an affirmative defense to prosecution under the FCPA’s anti-bribery provisions if a thing of value otherwise given to the foreign official is (1) reasonable, (2) bona fide and (3) directly related to the promotion, demonstration or explanation of (4) the payer's products or services. Congress deliberately left the FCPA’s key terms broad and undefined, providing a high degree of flexibility, but with a commensurate degree of uncertainty. The statute is as vague as the famous admonition by Justice Potter Stewart about determining when nudity becomes obscenity: “I know it when I see it.”
DOJ/SEC Guidance devotes all of one page to the subject, helpfully pointing out, “Whether any particular payment is a bona fide expenditure necessarily requires a fact-specific analysis.” At the risk of vast understatement, the business community was hoping for more.
Nevertheless, the Guidance does offer a non-exhaustive list of safeguards, compiled from several DOJ Opinion releases, that is better than nothing:
- Do not select the particular officials who will participate in the party’s proposed trip or program, or else select them based on pre-determined, merit based criteria
- Pay all costs directly to travel and lodging vendors and/or reimburse costs only upon presentation of a receipt
- Do not advance funds or pay for reimbursements in cash
- Ensure that any stipends are reasonable approximations of costs likely to be incurred and/or that expenses are limited to those that are necessary and reasonable
- Ensure the expenditures are transparent, both within the company and to the foreign government
- Do not condition payment of expenses on any action by the foreign official
- Obtain written confirmation that payment of the expenses is not contrary to local law
- Provide no additional compensation, stipends, or spending money beyond what is necessary to pay for actual expenses incurred
- Ensure that costs and expenses on behalf of the foreign officials will be accurately recorded in the company’s books and records.
Those are all good procedures to follow for planning meals/gifts/entertainment/travel after a decision to engage in such has been made, but what the Guidance largely ignores, and what businesses most want help with, is more fundamental than the “how.” It is, “Can we make the expenditure in the first place?”
Here I offer some additional practical guidance built up through many years of answering questions in this area.
Compliance for promotional and marketing expenses should conceptually focus on three fundamental questions. The most important is to determine whether the expenditure is "bona fide" or “corrupt." This requires that the business purpose of the expenditure be carefully defined. In other words, ask, “What products or services does the company wish to promote, demonstrate or explain?” As the DOJ/SEC Guidance suggests, the more the item leans in the direction of fun, and away from business, the more likely it is to be perceived by the DOJ/SEC as not bona fide.
On the bona fide question, it turns out that Justice Stewart’s formulation is not so bad after all. Anyone who has been around the business world long enough should have sufficient instincts to “know it when they see it” in terms of an expenditure that appears to be intended to ingratiate the company with a foreign official versus one that is hospitably polite, but not so nice as to overwhelm the business purpose.
Here I like to advise my clients to apply what I call “The Spouse Eye-Roll Test .” We all have those business occasions where decorum requires us to include our spouses, and, when we finally get around to inviting them, they react with a huge eye roll meant to convey, “Not another one of those boring old business events where you all talk about nothing but business.” You know you have veered into the “too nice” realm for FCPA analytic purposes if you instead can imagine your spouse happily responding, “Wow! That sounds great!” In other words, if it sounds like you’d have to plead/arm-twist a little to convince your spouse to go, then the balance for FCPA purposes between business and entertainment should be about right.
The next step is to make sure that expenditures are directly related to the defined business purpose, rather than being only indirectly or tangentially related to the business purpose. In other words, ask, “Is the expenditure necessary to promote, demonstrate or explain the product or service at the core of the defined business purpose? Or does the fun overwhelm the business purpose?” The more the expenditure (both in terms of time and resources) slants in the direction of fun, the more likely it is that the expenditure only indirectly promotes the company's goods and services.
Similarly, expenditures related to “good will” or “team building” or “establishing the relationship” with foreign officials are almost always indirect rather than direct and therefore do not satisfy the FCPA statutory criteria. Thus, the next time a marketing person says, “It’s customary in this part of the world to give the gift/have the meal/pay for the trip to establish good will with this official,” your compliance radar should be going off BING BING BING BING BING.
The final question to ask is, “Is the amount of the expenditure reasonable?” The reasonableness of the expenditure is contextual and fact specific, so that there are no broad general rules that can be defined in advance in order to ensure compliance. Nevertheless, appropriate areas to look in order to measure reasonableness include:
- prevailing market rates for similar expenditures
- the amount of the expenditure versus the government official’s salary or receipt of similar benefits from his or her own government
- activity of the company's US-regulated competitors when entertaining similar foreign government officials in a similar context
- comparing the company’s similar meal/entertainment/travel expenditures involving non-government recipients (this is a ceiling, not a floor, where spending more on government versus non-government persons creates an inference that the expenditure was precisely intended to improperly influence the government official)
- custom both locally and within the particular industry and
- a company’s own reimbursement guidelines for its own people at a similar peer level to the official when traveling/eating on the company dime.
Company reimbursement allowances tend to be highly frugal and business oriented; using that as the expected baseline for expenditures involving government officials is a very good analytical starting point.
Finally, I do have one procedural “how” to add to the DOJ/SEC’s list that is probably the single best thing a company do to avoid a violation in this area: BEGIN PLANNING EARLY. Given the statute’s breadth and flexibility in this area, if planning for a particular expenditure begins early enough, and legal compliance is part of that early planning, then an appropriate plan satisfying both the legal and business goals can almost always be constructed (the exception is those rare cases where the government official involved is truly and implacably corrupt).
Where most violations occur, despite a company’s otherwise good track record and intentions, is where the business person in Far Far Away plans the trip and calls the compliance counsel for approval only after the government official is already flying toward Company HQ while seated comfortably in first class. In contrast, when companies call me to review their plans with enough lead time, although I usually have to tweak some minor aspect of the plan (“Well, maybe the side trip to Disney World is not such a great idea . . . .”), I have found that when they’ve consulted me before invitations are issued and itineraries decided, I’ve never had to say, “No, you can’t do that.” Getting FCPA analysis at the planning stage of travel/entertainment is the best way to make sure the company satisfies its business and legal compliance interests to their fullest extent.
An earlier version of this article appeared on the blog FCPA Professor.