This alert, the fourth in our series addressing the Resource Guide to the U.S. Foreign Corrupt Practices Act (available here) that was jointly released by the Department of Justice ("DOJ") and Securities and Exchange Commission ("SEC") on November 14, provides: (i) a concise explanation of the Guide’s general principles regarding gifts, travel and entertainment; (ii) a summary of the Guide’s examples of expenses that are either clearly appropriate or illegal; and (iii) practical action items.
Prior Issues in this Series
Issue 1 - Top DOJ Official Elaborates on New FCPA Resource Guide
Issue 2 - Elements of Compliance Programs
Issue 3 - Relationships with Third Parties
Gift-Giving & Hospitality FCPA Risk
Gift-giving and hospitality have been considered business activities posing heightened FCPA risk, particularly after recent enforcement actions like Securities and Exchange Commission v. Veraz Networks, Inc. in which the SEC cited flowers for a CEO’s wife as a "questionable" expense. In the Guide, however, DOJ and SEC have given further advice to companies regarding corporate hospitality.
General Principles of Gift-Giving and Hospitality
The Guide recognizes that providing corporate hospitality is often an appropriate way to conduct business. In addition to specific examples discussed below, the government sets out "hallmarks" of appropriate gift-giving, including:
- Giving the gift openly and transparently;
- Properly recording the gift on the giver’s books and records;
- Providing the gift only to reflect esteem or gratitude; and
- Ensuring the gift is permissible under local law.
Specific Safeguards to Reduce the Risk of Hospitality-Related FCPA Violations
In the context of the affirmative defense of "reasonable and bona fide" expenditures, the Guide also identifies safeguards related to hospitality expenses (as compiled from previous DOJ releases) which can be incorporated into a company’s anti-corruption training and procedures:
- Do not select the particular officials who will participate in a trip or program, or select them based on pre-determined, merit-based criteria;
- Pay all costs directly to 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;
- Obtain written confirmation that payment of the expenses is not contrary to local law; and
- Ensure that costs and expenses on behalf of the foreign officials are recorded accurately in the company’s books and records.
The Guide does not insist upon specific procedures, but notes that "many larger companies have automated gift-giving clearance processes and have set clear monetary thresholds for gifts along with annual limitations, with limited exceptions for gifts approved by appropriate management." The Guide also observes that some companies "have created web-based approval processes to review and approve routine gifts, travel, and entertainment involving foreign officials and private customers with clear monetary limits and annual limitations."
Examples of Expenses Viewed as FCPA Violations
The Guide collects the following actual or hypothetical examples of FCPA violations that included gifts or hospitality:
- "a $12,000 birthday trip for a government decision-maker from Mexico that included visits to wineries and dinners;"
- "$10,000 spent on dinners, drinks and entertainment for a government official;"
- "a trip to Italy for eight Iraqi government officials that consisted primarily of sightseeing and included $1,000 in ‘pocket money’ for each official;"
- "one defendant paid personal bills and provided airline tickets to a cousin and close friend of the foreign official whose influence the defendant sought in obtaining contracts;" and
- paying for a vacation to Paris for a foreign official and his girlfriend in exchange for confidential, non-public bid information from the company’s competitors.
Examples of Expenses Viewed as Lawful
The Guide also presents a series of detailed hypotheticals relating to gifts, travel and entertainment. In the hypotheticals, the government affirms that promotional, branded gifts of nominal value are permissible. The Guide also goes further, however, and states that no FCPA anti-bribery violation would occur in the following scenarios:
- A company invites customers (including some foreign officials) out for drinks and pays a moderate bar tab for the group;
- A company provides a "moderately priced crystal vase" to a foreign official as a wedding gift and a "token of esteem or gratitude;" and
- During the course of a contract with a foreign instrumentality, a company invites employees of the entity to its facilities in the U.S. to provide training. As part of the trip, the company pays for the hotel and transportation costs, including business class airfare. The company also pays for a moderately-priced dinner, a baseball game and a play.
To the extent they are not already part of your compliance program, consider implementing the following action items:
- Incorporate the specific safeguards listed above into company training and procedures so employees can better avoid and detect questionable expenses;
- Require advance written approval of gifts, travel and entertainment expenses based on risk level;
- Set expense limitations specific to each jurisdiction in which your company operates;
- Track expenses that are related to particular government entities and/or officials so that the company can enforce annual limitations;
- Retain local counsel in advance who can opine on the legality of providing gifts and hospitality under local law; and
- For larger organizations, establish web-based approval of routine expenses.
Next in the Series
In early January, we will examine the government’s views of risks arising from mergers, acquisitions and joint ventures in Issue 5. We will address confidential reporting and internal investigations in Issue 6.