The Dos and Don'ts of Corporate Hospitality

Rigorous enforcement activity against those who run afoul of the Foreign Corrupt Practices Act is apparently causing some compliance executives to second-guess even routine compliance decisions on corporate hospitality.

That's what many in the compliance community make of the Justice Department's first FCPA advisory opinion release of 2011, which reiterates two nearly identical opinion releases issued in 2007 that provide guidance on when and how companies can host foreign officials without violating anti-corruption laws.

Under the FCPA, companies may seek a written advisory opinion from the Justice Department on any potential FCPA issue raised by a particular transaction or event. Getting the department's blessing in advance can help avoid a costly enforcement action or legal battle.

The recent guidance follows on the heels of an inquiry made by an unidentified company, asking whether it could pay travel, lodging, and meal expenses for two foreign government officials visiting the company's U.S. operations for two days. The requestor further noted that it “has no non-routine business pending before the foreign government agencies that employ these officials.”

Based under the circumstances, the Justice Department said the requestor's expenses are reasonable since they “directly relate to the promotion, demonstration, or explanation of [the requestor's] products or services.” As a result, the Justice Department said it would presume not to take any enforcement action over the proposed hosting of the officials.

The latest request for a review opinion, however, came as a surprise to some, because the answer seemed “pretty obvious,” says Mark Radke, a partner in the litigation group of law firm Arent Fox. “It is not a change in prior procedure, and it's pretty straightforward,” he adds.

Because the question posed to the Justice Department had already been asked—and answered—some compliance officers expressed surprise that the request was made at all. “This is a question that should never have gone to the Justice Department,” Howard Sklar, senior counsel of Recommind and a former compliance officer, wrote in a blog he maintains about FCPA issues.

“[A]ny reasonably competent anti-corruption compliance officer could have given them [the answer] on day one," Sklar wrote.“This tells me that the company does not have reasonably competent compliance personnel.”

Still, others say something can be learned in the Justice Department's review opinion. “There is another way to look at: This can be a valuable tool that people can use,” says Tom Fox, an independent FCPA compliance consultant and lawyer. Getting an answer directly from the Justice Department is an especially cost-effective means for smaller companies that may not have in-house counsel and can't afford to go to outside counsel, Fox adds.

That may be the reason for the inquiry in this case. “I think whoever wrote in on this one just wanted absolute certainty,” says Radke.

It could also be that a stricter anti-corruption enforcement landscape is driving many companies to take a better-safe-than-sorry approach. “What used to be, perhaps, gray areas now are routinely ruled out of bounds by compliance personnel at various companies,” says Radke.

Dos and Don'ts

In the release, the Justice Department cautions that it is not giving a blanket approval for companies in similar situations, nor does it shield the requestor from enforcement actions related to FCPA violations. “Additionally, this opinion release does not purport to endorse the adequacy of the requestor's anti-corruption policies and procedures,” the Justice Department said. Regardless, it does offer some insight into the Justice Department's thinking on what runs afoul of FCPA rules.

“When any piece of the entertainment or travel starts to look too luxurious, there could be questions.”

—Mark Radke,

Partner,

Arent Fox

So what, then, are appropriate practices when it comes to hosting a foreign government official? Corporate governance experts offer some dos and don'ts:

Do allow the foreign government agency to pick which officials will be traveling.

Do pay all costs directly to the service providers, rather than reimburse the foreign government or official for the trip.

Do ensure that training costs and expenses go toward educating the visiting officials about the operations and services of the company.

Don't do the trip at a time when you have some critical decision pending, such as when a foreign government official is about to award the company a contract or a license, Radke advises. Under such circumstances, the government could view an otherwise entirely appropriate trip as suspicious, he says.

Don't pay for first- or business-class travel. Have the foreign officials travel economy class.

Don't host spouses or family members of the foreign official.

Do not fund or host side trips or leisure activities or provide spending money.

Appropriate reasons for hosting the official include showing off a new product or service, giving a tour of a new facility or headquarter location, or introducing new employees. “If it truly has a business purposes, you have to be able to demonstrate that business purpose,” says Fox.

PROSECUTION GUIDELINES

The following excerpt from Greg Andres testimony before the U.S. House of Representatives describes the Principles of Federal Prosecution of Business Organizations:

When the [Justice] Department seeks to enforce the FCPA against corporate entities, it does so pursuant to internal procedures set forth in the department's united states attorney's manual. These rules, also known as the Principles of Federal Prosecution of Business Organizations, represent official department policy that all federal prosecutors must follow. The principles require federal prosecutors to consider the following nine factors when assessing whether to pursue charges against a business entity:

1. The nature and seriousness of the offense, including the risk of harm to the public,

and applicable policies and priorities, if any, governing the prosecution of

corporations for particular categories of crime;

2. The pervasiveness of wrongdoing within the corporation, including the complicity

in, or the condoning of, the wrongdoing by corporate management;

3. The corporation's history of similar misconduct, including prior criminal, civil, and

regulatory enforcement actions against it;

4. The corporation's timely and voluntary disclosure of wrongdoing and its willingness

to cooperate in the investigation of its agents;

5. The existence and effectiveness of the corporation's pre-existing compliance

program;

6. The corporation's remedial actions, including any efforts to implement an effective

corporate compliance program or to improve an existing one, to replace responsible

management, to discipline or terminate wrongdoers, to pay restitution, and to

cooperate with the relevant government agencies;

7. The collateral consequences, including whether there is disproportionate harm to

shareholders, pension holders, employees, and others not proven personally

culpable, as well as impact on the public arising from the prosecution;

8. The adequacy of the prosecution of individuals responsible for the corporation's

malfeasance; and

9. The adequacy of remedies such as civil or regulatory enforcement actions.

Source: Greg Andres Testimony.

Companies should also forgo taking visiting officials on side trips unrelated to the company's operations. “Where a lot of companies have got into trouble is sending foreign government officials to places like Disney World, New York City, Las Vegas,” Fox says. The emphasis from the advisory opinion is to “only send people to where you have a business site,” he says. 

Hospitality missteps have tripped up companies in the past. For example, global telecommunications company UTStarcom agreed in 2009 to pay a $1.5 million penalty to the Justice Department for FCPA violations. According to the Justice Department release, UTSI acknowledged responsibility for the actions of employees at UTS-China, a subsidiary that “arranged and paid for employees of Chinese state-owned telecommunications companies to travel to popular tourist destinations in the United States, including Hawaii, Las Vegas, and New York City."

The Justice Department said the “trips were purportedly for individuals to participate in training at UTSI facilities” but that "UTSI had no facilities in those locations and conducted no training." According to the release, “UTS-China then falsely recorded these trips as ‘training' expenses, while the true purpose for providing these trips was to obtain and retain lucrative telecommunications contracts.”

Attorneys say gray areas of potential non-compliance are not as easy to decipher, often because “unfortunately the cases that result in enforcement actions are those in which companies have gone far over the line,” says Fox.

Officials at the Justice Department agree. “I think from recent testimony, you can see that in fact we don't prosecute many cases of gray areas,” says Laura Sweeney, a Justice Department spokeswoman. Citing recent testimony by Greg Andres, acting deputy assistant attorney general for the Justice Department's Criminal Division, Sweeney adds that, “the cases we bring aren't even close to the line.” 

“These cases have often involved systematic, longstanding bribery schemes in which significant sums of money were paid,” Andres said in his testimony. “Department prosecutions have not involved single bribe payments of nominal sums.”

The Justice Department wants to see that companies, in addition to having a policy in place, are actually going through the appropriate compliance channels, Fox says. This means the person requesting the visit from the foreign government official should be sending all requests through the compliance department, which then can either approve the request or make appropriate modifications to ensure the company is complying with Justice Department and SEC procedures.