For the second time in as many years, Brazil plays host to a major world sporting event; following hot on the heals of the 2014 FIFA World Cup, the Olympic Games open in Rio de Janeiro on August 5, 2016.
The Olympics find Brazil at a turning point in the country’s history, at a time when the issue of corruption faces huge scrutiny from Brazil’s general public and from an active group of law enforcers and public prosecutors lead by Judge Sérgio Moro and his Lava Jato (car wash) investigation. Further afield, Brazil’s unfolding corruption scandals have caught the attention of international anti-corruption enforcement agencies with extraterritorial enforcement regimes, most notably perhaps, the U.S. Department of Justice and Securities and Exchange Commission.
The Olympic Games have, historically, been an opportunity for host cities and countries to show-off to the world, and are generally lavish affairs. With the world’s attention comes the opportunity for high-profile and highly sought-after hospitality opportunities, with a chance to watch the world’s finest athletes from a prime location, in a setting that comes around only once every four years. Increasingly, host cities, looking to recoup some of the enormous costs associated with staging a modern Olympic Games, have increased the price of such hospitality, so that today prime hospitality tickets for key events can cost several thousand dollars.
Corporate hospitality at the Olympics and other high-profile events can provide a bona fide relationship-building opportunity for companies. Nevertheless, such events are also a reminder of the risk that, when handled improperly, corporate hospitality can result in bribery or related improprieties. At least one company has recently faced significant penalties in the United States, relating to hospitality granted to public officials at the 2008 Beijing Olympics. In that case it was deemed that the anti-corruption compliance procedures implemented around hospitality at the games were insufficient to protect against violations of the U.S. Foreign Corrupt Practices Act (“FCPA”).
In light of the corruption risks generally associated with high-profile and high-cost hospitality events such as the Olympics, and the current level of scrutiny of corruption in Brazil, companies considering hospitality at the Rio Olympics would be well advised to ensure that their policies and procedures concerning corporate hospitality are comprehensive, well considered, and up to date; to ensure compliance with relevant law and to protect the company’s reputation. In this article, we examine where companies should draw the line with respect to corporate hospitality, what can be done to manage and mitigate the risks, and the importance of properly recording the associated expenses.
Hospitality and Anti-Corruption Laws
We consider briefly the relevant provisions and guidance on corporate hospitality under the Brazil Clean Company Act – Law No. 12.846/2013 (“Clean Company Act”), including more recent regulations generally prohibiting public agents from accepting invitations or tickets to sporting events. Due to their extraterritorial reach and the fact that hospitality in Brazil could cause companies to be in breach, we also consider the requirements of the FCPA, the U.K. Bribery Act (“Bribery Act”) and their respective guidance. Depending on a company’s group structure, its operations and the nationalities of the individuals involved in the hospitality, other regimes may also be implicated and should be considered and addressed accordingly.
Each of the Brazil, U.S. and U.K. regimes recognizes that corporate hospitality can be a legitimate business development tool, unrelated to corruption. But each also cautions that hospitality can constitute bribery when lavish and conducted with a corrupt intent. No matter which anti-corruption regime, when considering the cost and potential lavishness of hospitality, it is important to take into account not only the face value of the ticket, but also any associated value. For example, because of the demand for, and elusiveness of, Olympic Games tickets in Brazil, the opportunity to attend an event in itself (regardless of the ticket price) can be seen as having a substantial value attached to it. Indeed tickets for the most desirable events at the Rio Olympics are now selling for several times their original face value through illegal resellers. This “intrinsic” value of the Olympic experience, as arranged by an individual or company seeking to entertain a client, should be considered along with the actual price of the ticket (and any related offerings) when assessing the extravagance of the hospitality.
The Clean Company Act (Law No. 12.846/2013), which came into force in 2014, prohibits bribery of Brazilian public officials through the giving of an “undue advantage,” as well as other illegal conduct against the public administration in Brazil.
In October 2015, the Brazilian Office of the Comptroller General (“CGU”) released its official guidance on corporate compliance programs entitled, Integrity Program Guidelines for Legal Entities (“CGU Guidelines”). The CGU Guidelines specifically state that “[o]ffering hospitalities, freebies (‘brindes’) and gifts as courtesy to public agents or people related to them may constitute the granting of an undue advantage.”
The CGU Guidelines recognize that invitations to “receptions and social and business dinners, and offering gifts and presents on these and other occasions are commonplace,” and that in general such practices “are legitimate ways for the company to promote its work, spread its name and brand, and introduce its products and services to the external market.” As such, the CGU indicates that such legitimate expenditures should not, per se, be prohibited. However, companies must take care to avoid making invitations or giving gifts that would run afoul of the Clean Company Act by conferring an “undue advantage” on a public official.
The Clean Company Act holds companies strictly liable, meaning that the government need not show any intent, just that illegal conduct took place. Enforcement authorities therefore need only show that an undue advantage was actually given to a public official. Neither the Clean Company Act nor the CGU Guidelines define the term “undue advantage” in the context of corporate hospitality. However, federal authorities in Brazil have issued several regulations strongly suggesting that providing hospitalities at major sporting events would likely constitute a violation if given to a public official.
The most recent of these regulations was issued by the CGU on May 6, 2016. In part, this new regulation prohibits public officials from accepting invitations to entertainment events such as “concerts, performances and sports.” Although these regulations do not refer specifically to the Olympics, their timing and scope just ahead of the games should make hosting companies pay close attention to them. Excluded from the scope of the ban are situations in which the official is attending the event as a sanctioned representative of their institution, or where the official receives the invitation through a government distribution, as the result of a public promotion, or “by reason of friendship or kinship” not linked to his or her status as a public official. However, the prohibition would prevent a federal government official from accepting an invitation to an Olympic event from a private company as part of its corporate hospitality efforts.
Two similar regulations were issued just days before the start of the 2014 World Cup. On May 20, 2014, the Brazilian Public Ethics Commission (“CEP”) issued Guidance Note No. 2/2014 providing that certain high-level government officers were prohibited from accepting invitations to World Cup games or events. Then, on May 30, 2014, the CGU issued its own set of rules in Normative Instruction No. 1/2014, applicable to all federal executive branch officials not subject to the CEP regulation, which generally prohibited the acceptance of invitations to attend World Cup events.
It remains to be seen whether the CEP or the CGU will issue similar event-specific guidance to government officials in advance of the Rio Olympics. In any case, the message and approach from the Brazilian regulators has been clear and consistent: Brazilian officials will be expected not to accept corporate hospitality at the Olympic games, and companies may be prosecuted if they are caught trying to host them.
Brazilian law does not specifically address commercial bribery (where the recipient is not a public official), or regulate corporate hospitality exchanged between commercial organizations and employees. Nonetheless, care must be taken to ensure that private employees are not tempted or induced to improperly perform duties of their employment as a result of an offer of corporate hospitality and that the proper commercial relationship between the giving and receiving companies and individuals is not distorted.
For hospitality to constitute a bribe under the FCPA, the giver must have corrupt intent. According to the Resource Guide to the FCPA, released jointly in 2012 by the U.S. Department of Justice and Securities and Exchange Commission (“Resource Guide”), this requirement “protects companies that engage in the ordinary and legitimate promotion of their businesses while targeting conduct that seeks to improperly induce officials into misusing their positions.”
Indeed, the Resource Guide states that it is unlikely that the provision of a cup of coffee, taxi fare, or nominal company promotional item, for example, would “ever evidence corrupt intent.” As a result, small gift expenditures are rarely pursued by U.S. regulators except where they are part of an extended or aggregate pattern of conduct indicating an arrangement to corruptly influence foreign officials to obtain (or retain) business. In contrast, the Resource Guide indicates that lavish gifts and/or entertainment expenses are “more likely” to indicate an improper purpose and, thus, create potential FCPA liability. Recent FCPA enforcement indicates that Olympic and other high-profile hospitality is capable of falling into this second category.
At the closing ceremony for the London Olympic Games on August 12, 2012, the mayor of Rio de Janeiro accepted the Olympic flag from the president of the International Olympic Committee, Jacques Rogge, in anticipation of the Rio Games in 2016. Like Brazil, shortly before its hosting of the Olympics the U.K. implemented its Bribery Act, which came into force in July 2011. The Bribery Act, and the Clean Companies Act that followed it, represent a new wave of robust international anti-corruption legislation, which in some areas exceed the scope of the FCPA. These Acts, and others like them, have brought the promise of an increase global enforcement of anti-corruption cases outside the United States.
For present purposes, the key differences between the Bribery Act and its U.S. and Brazilian counterparts is that, whereas the FCPA applies only to government officials abroad (outside the United States), and the Brazilian regime to public officials in Brazil, the Bribery Act regulates public and private (commercial) bribery, whether domestic (in the U.K.) or abroad. The Bribery Act also makes it a criminal offence for any public official, or private person, to accept a bribe as well as to make one.
In general, under the U.K. Bribery Act, in order for hospitality to constitute a bribe, the giver must intend for the hospitality to bring about the improper performance of a duty by the recipient, or to reward such improper performance. Alternatively for the receiver to be prosecuted they must intend to be so influenced or actually breach their duty.
The U.K. Ministry of Justice Guidance (“MOJ Guidance”), which supplements the Bribery Act, makes clear the intention of this provision with respect to hospitality:
“Bona fide hospitality and promotional, or other business expenditure which seeks to improve the image of a commercial organisation, better to present products and services, or establish cordial relations, is recognised as an established and important part of doing business and it is not the intention of the Act to criminalise such behaviour. . . . It is, however, clear that hospitality and promotional or other similar business expenditure can be employed as bribes.”
The MOJ Guidance goes on to state that the more lavish the hospitality then, generally, the greater the inference that it is intended to influence the recipient.
Mitigating Hospitality Risks by Implementing an Effective Anti-Corruption Compliance Program
The sensitivity of hospitality, particularly around high-value and high-profile events such as the Olympics, dictates that companies should take care to implement meaningful and effective policies and procedures around corporate hospitality, and adequately train employees about what is considered acceptable under the relevant anti-corruption regime(s). Strong hospitality programs should include (among other safeguards):
|●||A mechanism for determining whether invitees are public officials;|
|●||Independent and genuine compliance review, oversight, and approval of the proposed hospitality. This must be a meaningful process, and for high-risk and high-profile events such as the Olympics, companies should expect to have to decline a good number of hospitality requests from their staff and executives;|
|●||Identification of red flags that might make the hospitality impermissible, such as:|
|– where the invitee is a key decision maker in the award of work to the host company;|
|– where there is an ongoing tender process; or|
|– where the invitee has requested the hospitality.|
|●||Guidance on permissible spend for hospitality (e.g., by setting per-country approval thresholds);|
|●||Consideration of the lavishness of the specific event and whether the invitee has received other hospitality in a given year – recurring hospitality to a single client during the course of a set time period may, for example, be perceived as lavish, regardless of the extravagance of any one event;|
|●||Assessment of local laws, rules, and restrictions, in addition to the global approach;|
|●||Provision, as necessary, for attendees to provide an ethics certification confirming that their acceptance of the hospitality is in line with their employer’s policies and local law;|
|●||For events such as the Olympics, where invitations are likely to have been sent out many months before the event itself, a mechanism should be established to ensure that no circumstances that would have prevented the invitee from being invited have changed and now exist at the time of the event itself (for example if a new tender has been issued or the invitee has been elected or appointed to public office);|
|●||Invitations should be formal and transparent, and clearly sent on behalf of the company;|
|●||Invitations may be issued to an official entity or a company as a whole, rather than directed to an individual, to promote openness and transparency and to avoid the appearance that the hospitality is for the benefit of a single individual, or to induce them to act in any particular way;|
|●||Companies should be sure that the event is also attended by representatives from the company, to ensure that any hospitality serves its intended business purpose;|
|●||Mechanisms to ensure that employees can only be reimbursed for hospitality expenses following appropriate pre-approval protocols; and|
|●||Adequate accounting provisions to ensure that hospitality expenses are promptly, accurately, and otherwise properly recorded in the company’s books and records.|
The 2016 Olympic Games will, no doubt, be a beautiful celebration of all that is best about the city of Rio and Brazilian culture. We hope that the focus of the world will be on the international harmony and sporting achievement showcased at the Games, rather than on the problem of corruption. Indeed, the Games may provide some welcome respite for Brazilians for whom the issue of corruption and its impact on the county has become a part of daily life. Companies, both domestic and international, can play their part in ensuring this, by implementing and enforcing effective internal hospitality and anti-corruption compliance programs.