Posts Tagged ‘FCPA’« Older Entries
When: Thursday, November 15 to Friday, November 16, 2012
Where: Gaylord National Resort & Conference Center, Washington, DC, USA
Join hundreds of in-house counsel, ethics & compliance executives, forensic accountants, FCPA, securities and corporate governance attorneys from around the globe for ACI’s 28th National Conference on the Foreign Corrupt Practices Act.
The 2012 program will feature the following NEW interactive discussions and case study panels:
- What Not to Do and Lessons Learned from the Most Costly FCPA Compliance Mistakes
- Friend or Foe? How to Survive an FCPA monitorship
- Creating a Home for the Whistleblower in a Bounty Hunter
- How to Effectively Communicate with the Board and Ensure Board Buy-in and Support of Your FCPA Compliance Program
- Navigating Diverging Client Interests during an FCPA Government investigation
- Inside the Defense of the Lindsey Manufacturing, Africa Sting and O’Shea Prosecutions
Hear from Senior U.S. DOJ and SEC Officials on:
- USDOJ Guidance on the FCPA
- SEC “Neither-Admit-Nor-Deny” Settlement Policy
- The Key FCPA Cases of 2012 and Current Enforcement Priorities
- Where Companies Go Wrong on FCPA Compliance
- Trip Wires in FCPA Internal Investigations
- Response to Whistleblower Allegations
- Disclosure, Cooperation and Global Compliance Expectations
- What Effective FCPA Books and Records Should Look Like
When: Tuesday, October 02 to Wednesday, October 03, 2012
Where: The Claremont Hotel Club & Spa, San Francisco, CA, USA
There is no denying that FCPA and corruption enforcement has seen a vast uptick across domestic and international jurisdictions. In an environment like this, it is critical to avoid getting caught in the regulatory crosshairs. Are your compliance program and internal controls sophisticated enough to withstand the impact?
Minimize your company’s risk exposure by ensuring that an effective anti-corruption compliance policy is in place, continuously audited and that all employees are trained and up to speed on what current corporate compliance policies are.
Learn what steps your company needs to take to successfully implement and monitor an effective
anti-corruption compliance program under the current enforcement environment.
Back for its 16th iteration, ACI’s FCPA Boot Camp, in San Francisco, is structured specifically to provide a forum for addressing the continuing and emerging areas of focus for FCPA enforcement. A must-attend event for legal counsel, fraud examiners, investigative and compliance counsel/officers and FCPA attorneys, attendees of this highly rated boot camp will walk away with a comprehensive, working knowledge of the current enforcement environment, along with practical strategies for addressing high risk areas of exposure across your business operations.
Featuring an updated agenda with increased focus on building a risk-based compliance program. Learn how to:
- Develop your company’s “heat map”: how to assess your specific risk profile based on your industry or geographic scope
- Prevent FCPA violations and facilitation payments in global supply chain and customs operations
- Leverage internal audit to detect books and records violations
- Conduct effective training for high risk markets: how to ensure the global trickle down of your compliance message
- Conduct effective and cost-conscious internal investigations
- Overcome electronic and data privacy challenges in global FCPA investigations
Strengthening Your Compliance Program in China through Employment Building Blocks – From Onboarding to Termination
Expert Article by Ananda Martin & Lesli Ligorner
For multinational corporations operating in the People’s Republic of China (“PRC”), employment considerations play a key role in the design of a robust anti-corruption compliance program. From onboarding to termination, having the right contractual protections and corporate policies in place can greatly reduce the risk of corruption-related issues and increase the ability to investigate and discipline employees who run afoul of the company’s code of conduct.
Getting it Right at the Beginning: Considerations for Onboarding
Because China does not recognize at-will employment arrangements, disciplining and terminating employees can be especially challenging. It is therefore crucial that PRC-based employers build contractual provisions into employment agreements that give them maximum flexibility in the event that an employee becomes involved in a corruption-related matter. From a contractual perspective, this means setting forth clear grounds for termination for violations of anti-corruption law under both PRC and international law. It also means providing Chinese language versions of all key employment documents, including the employment agreement, the employee handbook and the code of conduct or other documents outlining the company’s anticorruption policies. From a policy standpoint, the “tone at the top” – and in the middle – must send a clear message that bribery is inconsistent with company culture and must be supported by protocols and written materials such as an employee handbook that sets clear guidelines with respect to high risk expenditures such as gifts, travel and entertainment. Intake procedures for new employees should ensure that employees have a working knowledge of company policies and know whom to turn to with questions or concerns.
Getting it Right in the Middle: Monitoring and Internal Investigations
Some companies stop there, but a truly robust compliance program includes ongoing training, monitoring and strategic “stress testing” of sensitive areas such as relationships with third parties and government officials. Accounting, legal and human resources departments should work together to formulate coordinated approaches to perennial China challenges such as business expense reimbursements and handling of official invoices or fapiao.
In the event that an internal investigation becomes necessary, companies must be careful to comply with PRC rules governing employee data privacy. Best practices include building prospective language into employment agreements that permit an employer to search, copy and transmit employee communications on company computers and other electronic devices. Employers should also consider providing employees with company-issued cell phones and personal digital assistants to ensure that they can access all relevant data on those devices.
Getting it Right at the End: Considerations for Termination
As previously mentioned, China lacks the concept of at-will employment and imposes a number of obligations and restrictions on the employment relationship. Chief among these is the requirement that, in the event of an employment dispute, both parties submit to mandatory arbitration whose outcome, in practice, is heavily weighted in favor of employees. Many employers seek to avoid this process through a negotiated settlement. If allegations of bribery are driving the termination, management should consider the potential for misuse (or the appearance of misuse) of severance payments.
If arbitration is unavoidable, many employers will want to keep the content of such proceedings confidential. A pre-negotiated confidentiality agreement or similar language in the employment agreement is much easier to secure at the beginning of the employment relationship than at the end. Employers should be prepared for retaliation from employees slated for termination and have in place solid whistleblower protocols to investigate any allegations that arise from disgruntled workers.
Through proactive planning at the intersection of employment and anti-corruption law, PRC- based multinationals can bolster their compliance program and mitigate some of the risks attendant to doing business in this challenging environment.
For more information about the topics discussed in this [Client Alert], please listen to K. Lesli Ligorner’s talk on “Strengthening Your China Compliance Program through Employment Building Blocks: From Onboarding to Termination,” presented on September 9, 2011 as part of the American Bar Association International Anticorruption Committee’s programming.
Doing Business in the PRC – Identifying Corruption- Related Risks and Performing Necessary Due Diligence
Expert Article by Laura Flippin, Barbara Tsai & Lesli Ligorner
One of the most significant steps prior to making any new investment in the People’s Republic of China (the “PRC”) is to perform proper due diligence. The PRC presents unique challenges for foreign investors – and businesses covered by the U.S. Foreign Corrupt Practices Act (the “FCPA”) – which make performing thorough due diligence critical: the prevalence of corruption and customer kickbacks in the PRC, the strong expectation of business courtesies and gratuities in Chinese culture, and heavy reliance on third party intermediaries to conduct all aspects of business.
Regardless of whether the planned investment is a minority investment, a joint venture or an acquisition, thorough due diligence is critical to protect a company’s interests. One key aspect of due diligence should include assessment of corruption-related risks. This has never been as important as it is now, with the increased enforcement by the U.S. government of the FCPA, the advent of the U.K. Bribery Act of 2010 (the “U.K. Bribery Act”) which is currently expected to enter into force in April 2011, and the recent aggressive enforcement of local anti- corruption laws and regulations by the Chinese authorities.
Due Diligence in a Minority Investment
One common misconception is that corruption-related due diligence is unnecessary in situations where the investor will become a minority or passive investor. However, this mistaken perception, based on the U.S. government’s interpretation and enforcement of the FCPA, may catch a company off guard. The FCPA is a knowledge-based statute, and any knowledge of wrongdoing, regardless of investment percentage, can lead to potential liability for the covered entity or individuals. Similarly, where the investment company’s financial statements are reflected in the parent company’s consolidated financial statements, there is potential liability for a books and records violation under the FCPA. This applies regardless of whether the investment is a majority ownership stake, a small minority or an investment indirectly made through an investment fund. Accordingly, some degree of corruption-related due diligence is critical regardless of investment percentage or investment structure, depending on the particular facts and context of the investment.
When due diligence reveals that a compliance program exists, the due diligence process should continue to assess that program. It cannot be assumed that its requirements are in compliance and up to date with the U.S. government’s interpretations of the FCPA, the new requirements of the U.K. Bribery Act or recent developments in anti-corruption laws, regulations and interpretations of the PRC. For example, this assessment should consider whether there are compliance training and policies for employees, whether the training and policies are provided in Chinese and whether they are tailored to be culturally applicable and understandable to the workforce in the PRC. Further, if the compliance program was rolled out, the assessment should include whether any continuous monitoring and auditing of the program’s components take place. An effective compliance program must be regularly assessed and updated to adjust for the changing legal landscape and business needs.
Consideration of PRC Employment Law Aspects in Anti-corruption Due Diligence
Due diligence should also contemplate what employment contract or employee handbook provisions are in effect, and how and if anti-corruption policies and practices are communicated to employees (preferably in Chinese, as noted above, so that the policies will be binding on the employees). It is important to know whether the employees have agreed to the monitoring of the employer’s electronic systems, including Internet and email systems; whether the computer systems are all property of the company, rather than personal laptops or cell phones used for business; and other areas where applicable data privacy laws may affect a future investigation or collection and review of documents. Knowing if the employer went through the consultation process in accordance with the PRC Employment Contracts Law is also important in assessing whether a policy will be binding on an employee and grounds for termination if a violation is revealed. Examining the structure of employee compensation and expense reimbursement schemes, in addition to reviewing the tax treatment of payments to the employees, also often uncovers any irregularities and anti-corruption concerns during the due diligence process.
Third Party Due Diligence
The FCPA attributes liability for any corrupt acts undertaken by a covered company’s third party agents. The U.K. Bribery Act also covers the activities of a covered company’s third party agents and subsidiaries outside of the U.K. Such third parties include, in some cases, subsidiaries, as well as agents, distributors (regardless of whether they take title to a company’s products or not), customs brokers, business license agents and local sponsors. Therefore, corruption-related due diligence should also be conducted on any third parties prior to their performing work on behalf of a company and in the ongoing course of the business relationship.
Failure to prevent bribery is a strict liability offense under the U.K. Bribery Act. As such, a covered company may be liable where an employee offers or gives a bribe, even in situations where the company does not have knowledge of its employee’s wrong-doing. In this enforcement climate, proper ongoing due diligence and training are also critical to protect companies from the actions of their own management and staff.
Thorough Due Diligence Should Reduce Risk and Potential Liabilities and Costs
Comprehensive due diligence conducted prior to entering into any business relationship can save a company unnecessary post-investment financial woes, including remediation costs for restructuring corrupt business practices, conducting internal investigations, business losses resulting from kickbacks or illegal commissions on sales, business expense and reimbursement fraud, reputational harm, and in some cases where disclosure to the enforcement authorities is necessary, government- imposed civil and criminal financial penalties.
Corruption-related issues about which we frequently advise our clients include:
Due diligence on potential joint venture and other business partners;
␣ Pre-acquisition and pre-investment due diligence on target companies;
␣ Duediligenceonotherthirdparties ␣ Anti-corruption contract terms,
structuring and negotiation;
␣ Post-investment/acquisition anti- corruption remediation;
␣ Investigations related to allegations of corruption including kickbacks, bribes and financial accounting fraud
␣ Employee terminations and disciplinary action associated with allegations of corruption;
␣ Drafting of anti-corruption-related protections and provisions in employment contracts, employee handbooks and other work rules;
␣ Consultation practices with respect to rolling out anti-corruption-related policies that have disciplinary components;
␣ Translation of compliance programs and policies for use with the Chinese workforce;
␣ Adapting codes of conduct for the Chinese workforce;
␣ Advice on data privacy issues in connection with workplace investigations;
␣ Anti-corruption and expense approval policies and procedures;
␣ Anti-corruption training programs in English and Chinese (Mandarin and Cantonese);
␣ Advice on legality of certain proposed payments or expenses; and
␣ Assistance with disclosure proceedings and negotiations with U.S. and U.K. enforcement authorities.
Expert Article by Howard Sklar
I’m taking a page from my colleague Ralph Losey (let there be truth between us: I’ve met him once and talked to him twice, but he’s a “colleague” in the general sense, and I’m entitled to a little literary license, no?). In a recent piece, Losey wrote about the dirty little secret of attorney incompetence around eDiscovery. I feel the call to also write something uncomfortable.
I know this is a strange thing to hear coming from a man who writes constantly about anti-corruption, and even who co-hosts a weekly videocast on that very subject, but I’m frankly wondering if the whole area hasn’t gotten a little bit overblown. Sometimes I want to tell everyone—the Chamber of Commerce comes to mind—to just calm down.
Our dirty little secret, if this could rightly be called that, is that we practitioners vastly overstate the risk that the FCPA brings to companies. In-house Compliance officers have a good reason for it: we need to spur change. In order to get a corporation, especially a large multi-national corporation, to move you sometimes need a significant amount of pressure to overcome its inertia. Once you get things moving—that is, get budget, resources, and priorities—around the effort, momentum and positive inertia will keep you going.
Slight digression: most people use “inertia” to mean that it’s tough to get people to move. That’s true, but only half the definition. Bodies at rest tend to stay at rest, bodies in motion tend to stay in motion unless acted on by an outside force. I call “positive inertia” the second half of that statement: once you’ve got the corporation moving, it’s easier to keep it moving. Budgets, however, always act as a net negative force on Compliance.
Anyway, that’s why Compliance people have a motive to overstate risk: if they correctly state the risk, it won’t exert enough pressure on the business to get them to do anything. I’m trying to understand why outside counsel does it. The cynic in me believes that I already know the answer, but my better angels are still searching for a reason.
First, though, let’s explore whether I’m correctly stating a problem: do we overstate FCPA risk?
I’ve read with interest (and sometimes distaste) the efforts to reform the FCPA. I’ve seen presentations by firms about gifts and hospitality, and I’ve heard Ken Clarke talk about it in front of the House of Lords. He was talking about why the MOJ was going to issue guidance (which they did, and which I pilloried). He said that British companies were afraid:
fears sometimes aroused by the compliance industry, the consultants, the lawyers who will of course try to persuade companies that millions of pounds must expended on new systems which in my opinion no honest firm will require to comply with the act.
The only issue I’d raise with this quote is the word “sometimes.”
Compliance officers regularly talk about how they need to “scare the sh%t out of the business.” We develop Powerpoint slides with headlines like “Siemens pays $1.2 billion.” If we can get away with exclamation points, it’s “SIEMENS PAYS $1.2 BILLION!!!” We talk about “hundreds of millions” in fines. Truth be told, in the 34 years since the Act was passed, there have been, what, 8 cases where the fine has gone over $100 million?Eight. Granted, they were mostly in the last two years, but if we’re going to honestly quantify financial risk, it’s not nine figures. And reputation risk? What’s the real risk? How much business did Siemens lose after their incident? Answer: I understand they gained revenue. Sure, being on the front page is uncomfortable, but it’s not a show-stopper.
Same thing with the whole knowledge argument. Theoretically, a company can be held liable for the actions of an employee of which no senior management was aware. But has it happened? I can’t think of a case. In the vast majority of cases, senior management not only knew, but either actively participated or gave a wink and nod to the scheme.
Same thing with the whole “the FCPA is vague” argument. Oh, please. The DOJ has taken a remarkably even-keeled stance on interpreting the FCPA. The “novel” legal theories simply aren’t. You have your run-of-the-mill respondeat superior cases. Successor liability cases. And state-owned-entities are government officials. Even if you disagree with it, you can’t say it’s vague, or that the DOJ has inconsistently applied its definitions. I think the SOE interpretation has been around since the Stone Ages (aka Peter Clark). These are not novel legal theories, and any attempt to paint them as such is disingenuous at best.
Nor can you say that the DOJ hasn’t been clear about what it expects from companies. As far back as the Metcalf and Eddy case in 1999, the DOJ has—I was going to say “signaled,” but it’s more overt than that—outright told us exactly what they expect. Over time, it’s been clarified: opinion release 04-02, then the current Schedule C, and the enhanced obligations of J&J. It’s not rocket science. Have a clear policy. Implement it in a real way. Make sure that senior people take accountability for it. The rest is just details. And by the way, you can read everything you need and never attend a single luncheon. The problem here isn’t “I don’t know what to do,” the problem is “I know what I need to do, I’m just not willing to do it; it’s too hard, and it costs too much.” (Or the ubiquitous “you’ll kill the business.” Or worse: “if we don’t make these payments, our competitors will.”) That’s a horse of an entirely different hue.
And who says we’re even entitled to this kind of hand-holding? We don’t expect the DOJ to fall over themselves when it comes to antitrust laws, telling us how to comply. And talk about vague! What exactly is a “contract, combination, or conspiracy in restraint of trade?” We don’t expect it when it comes to the False Claims Act. And wow, what a gold mine that is for the government. Between 1986-2010, the government recovered over $25 BILLION for violations of the FCA. Take out the “P”, and boy do the numbers get big in a hurry. That’s what, 8 times the FCPA? 9 times?
What about facilitation payments? Neither the DOJ nor the SEC has everbrought a case solely because of a facilitation payment. Talk about overblown hype! It’s also not a definitional problem. If you are legally entitled to what you’re paying for, it’s a facilitation payment. If it’s a decision, however minor, it’s a bribe. Plus, let’s face it, facilitation payments aren’t your problem. They’re a red herring. I’ve done this myself, sadly. What I used to call the “nightmare scenario.” A facilitation payment gets made. Because SAB 99 doesn’t quantify “materiality,” but instead uses factors to be considered, including whether a payment violates a law, you could conceivably have a $5 payment which you thought was a facilitation payment—but which wasn’t—be a material misstatement which would require an 8-K. Is that full of crap, or what? Again, facilitation payments aren’t your problem. If you’re thinking about those, you’re wasting your time. We all need to take a deep breath and lighten up about it. I don’t like them, but seriously, lighten up. The chance of you getting prosecuted for foreign bribery because you paid some cop $5 to let you out of a ticket is exactly nil. The chance of the SEC bringing a books-and-records case because of facilitation payments is nil. What you can get is an internal controls problem, if the numbers get big, but even that’s unlikely. And your internal controls problem isn’t because you’re not measuring your facilitation payments. It’s a symptom of a larger problem. Plus, in every case I can think of, any mention of facilitation payments was a minor adjunct to a more traditional bribery scheme.
Dodd-Frank? Well, maybe the odds of a whistleblower going in are a little higher, but the Whistleblower Action Network says that most whistleblowers report in-house first, and get rebuffed at best. So your problem is cultural. But even so, the SEC can’t possibly act on every whistleblower complaint: not enough resources. So even that “increased risk” is minuscule.
These are picayune details. The DOJ doesn’t deal with the small stuff, frankly. There’s just too much huge, obvious, blatant, right-in-the-wheelhouse, didn’t-care, out-and-out bribery going on to worry that someone put a tenner in their passport when they handed it to the Customs guy, you know? Even the poster boy for petty prosecutions, the SEC bringing the Veraz Networks case, I don’t think would have been brought if there hadn’t been that “gift scheme” email. I might be wrong. Could be, some supervisor at the SEC needed a stat. I also don’t know how significant it was that it wasn’t a home-office case. It was brought by the San Francisco office; it was also brought about two months after the FCPA Office in San Francisco was formed. Cheryl Scarboro’s name is nowhere to be found on the complaint. Significant? There might have been other forces at work, besides how bad the underlying acts were. And the former AG, talking about the “$200,000 cab ride?” That is, the DOJ getting a company to spend over $200,000 on an investigation because of a cab ride? Never happened. They tried to track it down, and it was one of those “it happened to a friend of my brother’s cousin” kind of stories. In other words, bullsh%t.
And we’re all talking about 2011 being “the year of the trial.” Really? How many trials have there been? Five? Maybe? WooHoo! Five whole trials. Even Chuck Duross, at a recent conference, when asked about trends in trials, said that the sample size was too small to form any real conclusions.
The DOJ’s enforcement record, and the perception of that record, are wildly different. I would call the DOJ’s enforcement of the Act to be restrained, reasonable, conventional, and maybe even unoriginal. If a legitimate criticism could be leveled, I would rather take the DOJ to task for structuring deals to the benefit of corporations! Why charge subsidiaries with bribery, and internal controls violations for the parent? Because that avoids debarment issues. Fines, as a percentage of corporate revenue, are tiny. I would push the DOJ to be more aggressive, not less.
Are we wrong to try to scare the crap out of the business? I don’t know. The business doesn’t move over theoretical risk. But certainly the degree to which the industry that has popped up around the FCPA has an inherent interest in puffing up the underlying risk creates at the least an apparent bias. We all feed off it: risk equals fear equals action equals money for consultants, lawyers, compliance people (in the form of jobs, resources, and budgets), training suppliers, and everyone down the line. It’s not a flattering equation.
Howard Sklar is Senior Corporate Counsel at Recommind, Inc. Howard represents Recommind to corporations and law firms. Prior to joining Recommind, Howard was Global Trade and Anti-Corruption Strategist at Hewlett-Packard Co., running HP’s global anti-corruption compliance program and providing counsel on compliance with US sanctions laws. Before HP, Howard was Vice President, Compliance and Global Anti-Corruption Leader at American Express Co. Howard was the chief of compliance for three operating divisions at American Express comprising 22,000 employees in 40 countries.
Before moving in-house, Howard served 12 years as a prosecutor and regulator, first as an Assistant District Attorney in Bronx County, New York. As an ADA, Howard specialized in computer investigations and other high-tech crime, lecturing in-house and at police departments in the New York area. After, Howard spent six years at the Securities & Exchange Commission as a senior enforcement attorney in the Branch of Internet Enforcement. At the SEC, Howard investigated and prosecuted violations of the securities laws, including insider trading, accounting fraud, and market manipulation, specializing in those frauds which were perpetrated using the Internet as means of defrauding investors.
Howard is a member of the US Court of Appeals 7th Circuit eDiscovery Committee and is a participant in the Early Case Assessment and Education subcommittees.
Howard holds a Juris Doctor, cum laude, from the Washington College of Law at The American University and a BA in History from Tufts University.
Professional Affiliations: New York State Bar, US Court of Appeals 7th Circuit eDiscovery Committee
Admissions & Courts: New York State courts, Southern District of New York, Eastern District of New York, District of Colorado
Education: Tufts University, BA; Washington College of Law, The American University, JD.
- Scare the Crap Out of Them
- When Is A State-Owned Entity An “Instrumentality?” My Answers Will Surprise You
Contact Howard Sklar
Email address: firstname.lastname@example.org
Expert Article by Lesli Ligorner & Barbara Tsai
With recent headlines proclaiming stringent enforcement of the U.S. Foreign Corrupt Practices Act (“FCPA”) by the U.S. government, companies covered by the FCPA can no longer afford to maintain an attitude of “business as usual” in China. The FCPA prohibits U.S. companies and companies listed or having sponsored ADRs on U.S. stock exchanges from corruptly offering or providing anything of value to a “foreign government official” – including employees of state-owned entities (“SOEs”) – for the purpose of obtaining or retaining business. U.S. companies doing business in China are often faced with the conundrum of deciding whether a gift is a permissible business courtesy or whether it has crossed the fine line into being an illegal bribe. The FCPA’s all-encompassing inclusion of “anything of value” within the definition of what constitutes a potentially corrupt payment or offer casts a wide net. Accordingly, because neither the FCPA nor case law sets any specific dollar-value threshold to distinguish a permissible gift from an illegal bribe, the question of whether a gift could be construed as an illegal bribe has been and continues to be the subject of much scrutiny and debate and corporate heartache. The issue is particularly relevant and sensitive in China given its gift-giving culture and “guanxi” – the complex dance of business courtesies and hospitality that forms the social foundation for conducting business in China.
State-owned Entities as Government Actors
In China, where most primary sectors, such as banking, power, telecommunications, and oil and gas, are predominantly state-owned, even rank- and-file employees at SOEs are deemed ‘government officials’ for purposes of the FCPA. Further, many of these ‘government officials’ behave like private players in commercial playing fields and not in the manner traditionally associated with the behavior of government officials.
Illegal payments do not necessarily have to be given as cash payments and can also come in the form of lavish gifts such as Rolex watches, real estate, stocks, fancy sports cars or even paid university tuition for an official’s son or daughter. The myriad forms in which companies provide bribes are limited only by the creativity of the bribe-payer. Notably, while the FCPA does not expressly prohibit the giving of gratuities or gifts, the U.S. government takes the position that lavish gifts and entertainment constitute illegal bribes when made in connection with obtaining or retaining business or business advantages (such as reduced taxes or customs levies). This poses cultural challenges in China where gifts and entertainment are expected and required just for business people to get a foot in the door.
Promotional Expenditures – The Affirmative Defense
The FCPA provides an affirmative defense for promotional expenditures incurred in connection with bona fide and legitimate business purposes. Such expenses must be bona fide and reasonable in value and directly related to the demonstration, promotion or explanation of products or services. Whether expenditures satisfy this affirmative defense is a highly fact-specific analysis and typically involves specific situations where product demonstration or training is provided. Other than specific situations covered by this affirmative defense, the U.S. government has tended to view high-value gifts and business courtesies with suspicion.
PRC Anti-Corruption Laws and Regulations
No discussion would be complete without examining another key consideration which many companies commonly overlook— local law. Notably, many of the FCPA’s prohibitions overlap with similar prohibitions under PRC law. For example, it is a criminal offense to provide PRC public officials with “money, property, fees or kickbacks” in order to obtain an improper advantage.1 Unlike the FCPA, “public officials” in this context includes PRC government officials and specifically designated officials at or assigned to SOEs and does not include the rank-and-file employees at SOEs. It is also a criminal offense for private commercial parties to provide or receive money or property of “relatively high value” to secure an improper advantage.2 Additionally, commercial bribery is prohibited in connection with the sale or purchase of goods and services.3 Notably, although PRC law does not specifically include employees of SOEs within the definition of public officials, such individuals are covered under PRC anti-commercial bribery laws.
Furthermore, PRC government officials are required to make filings with the authorities for any gift received (this administrative filing requirement does not explicitly include meals) that is valued at CNY100 or above.4 For any gift valued at CNY200 or above, the government official must “make a filing” and “hand up” the gift to the PRC authorities. But, if the aggregate value of the gifts that an official receives in a certain year exceeds CNY600, the recipient is supposed to “hand up” those additional gifts. Furthermore, all cash gifts, negotiable securities or gold and silver jewelry items are supposed to be “handed up” and the relevant filings must be made, excluding those gifts given between relatives and friends.5 Most importantly, the regulations mandate that PRC government officials “hand up” all gifts regardless of value, which may influence the “fair performance” of their official duties and that the relevant filings must be made.
In light of these criminal and civil law prohibitions and administrative regulations, gift giving should be tempered where prohibited under PRC law, even if the gift-giver itself may not necessarily be subject to all of these requirements.
One way in which some companies covered by the FCPA have deferred to local law considerations is to fix the threshold for any gift-giving at the CNY200 limit, thereby allowing public officials to comply with administrative requirements while fixing the value of the gifts at something that the U.S. government would also likely find to be reasonable. It is unlikely that a gift valued at CNY200 could be interpreted as influencing a decision to award business to a company. Nonetheless, in the past, enterprising individuals have attempted to bypass gift value thresholds by providing a large number of gifts, each valued at the CNY200 threshold, to the key decision- making individual so that the total value of gifts received far exceeds the minimum threshold.
To Gift or Not to Gift
Determining whether a gift is appropriate starts with an examination of local law and customary practice. One caveat to this is that the U.S. government has taken the position that it is not a valid defense to assert that the company’s actions do not violate the FCPA simply because all of its competitors are doing the same thing. 6Furthermore, even widespread industry practice is not a valid defense. Accordingly, local law and customary practice are not definitive, but merely serve as guidance.
Companies with Chinese operations are often called upon to decide what type of gift to give customers during major holidays such as the Spring Festival. This is a difficult decision, particularly in a business climate where some competitors give red envelopes containing cash (“hong bao”) in amounts up to several thousand Chinese Yuan while others host and pay the costs for top customers’ internal social functions and contribute annual party raffle prizes, ranging from transportation cards to MP3 players to overseas air tickets. Gifts are traditionally given during two major holidays in China – the Spring Festival (Lunar New Year) and the Mid- Autumn Festival. Prior to Spring Festival, in February or March of each year, hong bao are traditionally given, both in social and business settings. Although local tradition and practice appear to mandate cash gifts during the Spring Festival, cash gifts create the appearance of impropriety, and many companies covered by the FCPA therefore prohibit them out of prudence.
During the Mid-Autumn Festival, in September or October of each year, mooncakes are traditionally given. In contrast to hong bao, giving a box of mooncakes generally does not pose a problem and appears to be a perfectly acceptable business courtesy during the holiday season. However, compliance officers and executives should scrutinize even those requests to give government agencies and customers mooncakes. It is not uncommon for mooncake boxes to contain cash or other high value gifts at the bottom of the box. In other instances, vouchers are given instead of mooncakes.
Again, while this may look fine on the surface, upon digging a little deeper, the company may learn that the vouchers were exchanged for the cash value of the mooncakes so the recipient or customer never receives the mooncakes. As mooncakes can range in value from the relatively inexpensive CNY100 per box to thousands of Chinese Yuan per box, this gift is not always just a box of tasty sweets. Needless to say, understanding the precise nature of the proposed gift is critical to determining when a gift is a “gift” or something more nefarious.
Companies need to determine whether giving the proposed gift will create an appearance of impropriety. The non- exhaustive list of factors include the following: (i) the reasonableness of the gift as a matter of local business practice and custom, (ii) the identity of the recipient, (iii) whether there is any pending business or any pending approvals before the recipient, (iv) the frequency of gift-giving to the recipient, (v) the value of the gift, (vi) whether such a gift is being provided openly and transparently, and (vii) the overall circumstances surrounding delivery of the gift.
If the gift is not being given for the purpose of influencing business, and there is no current business pending before the government official or entity, then the gift may be acceptable under the FCPA, which, again, does not prohibit a company from giving a true gift. However, if there is a pending business contract before the recipient, either a state-owned entity or official and the contemplated gift is costly and the intended recipient just so happens to be the decision-maker, these circumstances create an appearance of impropriety. The U.S. government would likely view the gift with suspicion. Companies should therefore understand the risk that giving that gift will carry.
Sometimes the circumstances surrounding a proposed gift must be examined in light of past and anticipated future behavior. A company may decide that it is appropriate to give a gift valued at CNY1,000 for the Spring Festival, but then a second gift one month later valued at CNY3,000 for the official’s birthday would likely not be appropriate given the aggregate total given. Alternatively, if there is currently no pending contract before that official’s agency or department but the company is aware of or anticipates a potential sale within another month, a risk-adverse company would likely decide to not allow the gift to be given. Alternatively, the company may decide that giving more gifts with lower values to the officials or department presents far lower risk and therefore is tolerable.
Varying Corporate Policies
Some companies have no approval policy in place directly addressing gifts for officials, while others vest discretion for so-called ‘reasonable’ expenditures in a responsible businessperson. Other companies fix strict dollar-value thresholds with or without approved exceptions. Approval for gifts is typically given by one or more of the following: corporate management, legal department, ethics or compliance officers, and/or country or general managers.
In the absence of a clear policy, the burden resting on the decision-makers’ shoulders to exercise the proper discretion can be unbearably high – particularly in light of the potential risks under the FCPA for any approved improper payments. Hence, because of the inherent risks in making these types of judgment calls, some companies have prohibited the giving of gifts or business courtesies altogether.
In the ideal world, it would not be a violation of the FCPA and one could even arguably gift an official with a case of Chateau Lafite so long as there is an absence of intent to influence. However, it becomes very difficult to defend against the perception that giving such a lavish gift creates, particularly given the limitations on the affirmative defense discussed above. Further, where the acceptance of the gift is dubious or not permitted under PRC law or administrative regulations, giving high-value gifts of this nature carries significant risk – risk that many FCPA-covered entities are not-or should not be-willing to bear.
In sum, whether a particular business courtesy crosses the line of propriety and does not constitute a violation of the FCPA cannot be answered by referring to a simple yes or no checklist. In this age of increased enforcement under the FCPA, companies must tread carefully along the line of providing business courtesies which may create the perception of impropriety. While the FCPA does not prohibit companies from giving gifts to PRC government officials and employees of SOEs, providing extravagant gifts to those individuals presents risks that companies must monitor and evaluate – both under the FCPA and PRC laws and regulations. Companies that are covered by the FCPA should ensure that they have in place a rigorous approval system and policy regarding business courtesies to avoid inadvertently running afoul of the FCPA. Further, they should be actively monitoring on a periodic basis how the policy is applied and compliance with the policy.
1 The threshold for a criminal commercial bribery offense is CNY5,000 for the recipient of the bribe, CNY10,000 for individual bribe-payers and CNY200,000 for enterprise bribe-payers. PRC Criminal Law, art. 389. Under Article 3 of the Regulations on Standards for Filing a Case for Investigation by the People’s Procuratorate Directly (Trial), promulgated by the Supreme Procuratorate and effective as of September 16, 1999 (“Standards for Filing a Case”), a criminal case should be filed against public officials who accept CNY5,000 in bribes or who “extort money or property” from others. Additionally, Article 5 of the Standards for Filing a Case states that a criminal case should be filed against individuals who give bribes exceeding CNY10,000 or “pay bribes for illegal interests”, among other things.
2 PRC Criminal Law (revised and promulgated by the National People’s Congress on Mar. 14, 1997 and effective on Oct. 1, 1997), arts. 163 and 164.
3 PRC Anti-Unfair Competition Law (promulgated by the Standing Committee of the National People’s Congress on Sept. 2, 1993 and effective on Dec. 1, 1993), art. 8.
4 See Measures for the Registration and Management of Gift Acceptance by Officials of Central Party Organs and Government Institutions in Internal Communications (promulgated by the Government Offices Administration of the State Council on Sept. 2, 1995 and effective as of the same date) (the “Measures”), art. 3.
5 SeeMeasures,arts.1and2. 6 U.S. v. Kay, 359 F.3d 738 (5th Cir. 2007).
Thomas Fox has practiced law in Houston for 25 years. He is now assisting companies with FCPA compliance, Risk Management and international transactions. He was most recently the General Counsel at Drilling Controls, Inc., a worldwide oilfield manufacturing and service company. He was previously Division Counsel with Halliburton Energy Services, Inc. where he supported Halliburton’s software division and its downhole division, which included the logging, directional drilling and drill bit business units.
Tom attended undergraduate school at the University of Texas, graduate school at Michigan State University and law school at the University of Michigan.
Tom writes and speaks nationally and internationally on a wide variety of topics, ranging from FCPA compliance, indemnities and other forms of risk management for a worldwide energy practice, tax issues faced by multi-national US companies, insurance coverage issues and protection of trade secrets.
- How Does the FCPA Apply to Your Business? (January 24th, 2011)
- Franchising and the FCPA (January 19th, 2011)
- The FCPA and Mergers and Acquisitions (December 8th, 2010)
- What’s in a Name Under the FCPA (November 17th, 2010)
- How to Risk-Base Supply Chain Vendors Under the FCPA (November 17th, 2010)
- Proposed Reforms to the FCPA: the Compliance Defense and Respondeat Superior (November 8th, 2010)
- US Sentencing Guidelines Changes Becomes Effective November 1st (October 30th, 2010)
- The Six Principles of a Best Practices Anti-Corruption Program Under the UK Bribery Act Guidance (September 23rd, 2010)
- Promotional Expenses Defense Under The FCPA (August 24th, 2010)
- The Top 3 FCPA Hits of 2010 (July 14th, 2010)
Contact Thomas Fox
Phone: 1-832-744-0264 (US), +44 (0) 23-92006548 (UK)
Do you need an immersion in the FCPA and the elements involved in the key cases? This highly rated pre-conference workshop is designed to provide you with a comprehensive introduction to the FCPA and cover all the bases: the anti-corruption and anti-bribery elements of the statute, internal controls and accounting requirements, and intersections with Sarbanes-Oxley and SEC reporting requirements. Delegates consistently give it top marks for both content and presentation. Learn more by visiting the 25th National Conference on the Foreign Corrupt Practices Act homepage!
A named target of both the U.S. Department of Justice and the U.S. Securities and Exchange Commission, it is no secret that life sciences companies are now under the FCPA microscope. Focusing their investigation on payments made overseas to boost sales, speed approvals and influence drug trials, it appears the government’s industry-wide sweep is also targeting bribes paid to government-employed doctors, regulators and hospital committees.
Join us for an advanced discussion of specifically targeted high risk enforcement areas, within the life sciences industry, including:
- Payments made to government-employed doctors, HCPs, KOLs, hospital and reimbursement committees associated with drug and device sales and marketing
- Foreign clinical trials due diligence and monitoring
- Drug and device approvals in emerging markets
- Third party activity within global parent, subsidiary and distribution operations
Benefit from new sessions to address –
- Local enforcement and unique FCPA compliance challenges within China and India
- How FCPA cases are prosecuted and coordinated between the SFO and local foreign prosecutors
- New compliance expectations for life sciences companies under the UK Bribery Act
- Immediate steps to take when the Government comes knocking
Gain firsthand industry insights from:
Bayer Healthcare Pharmaceuticals
Eli Lilly and Company
Johnson & Johnson
St. Jude Medical