Font Size:

Companies in the United States often undertake extensive promotional activities to market and sell their products throughout the world. These efforts can include paying the expenses for customers to travel to company facilities for product demonstrations, training programs and conferences. When that customer happens to be a foreign government-controlled enterprise (which may not be readily apparent on the surface), there is the potential that the payments will be construed as bribes that run afoul of the Foreign Corrupt Practices Act.

Accordingly, when dealing with foreign entities, companies must take steps to ensure that payments for promotional activities are legitimate business expenditures able to withstand the scrutiny demanded by this law.

OVERVIEW OF THE ACT

The FCPA criminalizes bribery of foreign government officials.

It prohibits giving, or even offering, "anything of value" to a foreign government official in order to get the official to use his or her influence to assist in obtaining or retaining business or securing an improper advantage.[FOOTNOTE 1] The FCPA does not define "value," but the term has been broadly construed to include tangible and intangible benefits.

Paying the expenses for customers to attend product demonstrations or training programs would be construed as providing those customers with something of "value" under the act. Therefore, the payments have the potential to implicate the FCPA.

That being said, not all payments to foreign officials are banned by the act. The FCPA includes as an affirmative defense payments that are "reasonable and bona fide" expenditures, "such as travel and lodging expenses, incurred by or on behalf of a foreign official" as long as the payments are "directly related" to "the promotion, demonstration or explanation of products or services" or the "execution or performance of a contract with a foreign government or agency thereof."[FOOTNOTE 2]

Notably, while styled as an "affirmative defense," this provision serves merely to clarify the type of conduct covered by the act. Put another way, the conduct that the FCPA prohibits would be the same whether or not the defense existed -- if a payment is corruptly made, it cannot be a reasonable and bona fide expenditure protected by the defense.[FOOTNOTE 3]

FCPA ENFORCEMENT ACTIONS

There have only been a handful of enforcement actions addressing the propriety of paying for the travel and entertainment expenses of foreign officials. The most recent was late last year, when Lucent Technologies Inc. entered into a nonprosecution agreement with the Department of Justice and settled an FCPA action with the SEC.

According to the SEC's complaint, "[f]rom at least 2000 to 2003, Lucent spent over $10 million for approximately 1,000 Chinese foreign officials" to take more than 300 trips to the United States and elsewhere.[FOOTNOTE 4] Most of the trips were "ostensibly designed to allow the Chinese foreign officials to inspect Lucent's factories and to train the officials in using Lucent equipment."[FOOTNOTE 5]

"In fact," the complaint alleged, "during many of these trips, the officials spent little or no time in the United States visiting Lucent's facilities. Instead, they visited tourist destinations throughout the United States, such as Hawaii, Las Vegas, the Grand Canyon, Niagara Falls, Disney World, Universal Studios and New York City."[FOOTNOTE 6] In addition, in a number of instances, Lucent provided the officials with excessive daily per diems notwithstanding that it paid all lodging, transportation, food and entertainment expenses.[FOOTNOTE 7]

The lavish nature of the trips, as well as the minimal time actually spent at Lucent factories, cut against any argument that the expenditures were both "reasonable" and "directly related" to business with the officials or their employers.

For example, on one occasion, "six officers and engineers" who Lucent had identified as "decisions-makers or influencers" at one of its Chinese state-controlled customers "visited the United States for a period of two weeks at Lucent's expense."[FOOTNOTE 8] "Although the Chinese officials spent five days visiting Lucent facilities in Illinois, New Jersey and Colorado, they spent nine days traveling, at Lucent's expense, between cities and visiting Boston, Las Vegas, the Grand Canyon and Hawaii for sightseeing, entertainment and leisure activities."[FOOTNOTE 9]

Lucent recorded expenses for the trip in an account called "Transportation International" which, the SEC alleged, was originally intended to be used for "costs of international freight forwarded and transportation provider services where the product crosses country borders."[FOOTNOTE 10]

In settling the matter, Lucent agreed to pay $1 million in fines and $1.5 million in civil penalties. Lucent also agreed to adopt new internal controls, policies and procedures sufficient to ensure that it makes and keeps fair and accurate books, records and accounts, as well as a rigorous anti-corruption compliance code designed to detect and deter violations of the FCPA and other applicable anti-corruption laws.[FOOTNOTE 11]

In the only other action dealing exclusively with the FCPA's affirmative defense for promotional expenses, in 1999, the DOJ alleged that Metcalf & Eddy Inc. paid the costs of travel, lodging and entertainment for two trips from Egypt to the United States by the chairman of an Egyptian governmental entity, his wife and his two children.

According to the DOJ's complaint, Metcalf & Eddy paid for the trips in order to induce the chairman to use his influence to help Metcalf & Eddy win contracts.[FOOTNOTE 12] The first trip included travel to Boston, Washington, D.C., Chicago and Orlando.[FOOTNOTE 13] The second trip included travel to Paris, Boston and San Diego.[FOOTNOTE 14]

On both trips, the chairman "received 150 percent of his estimated per diem expenses in a lump sum prior to leaving Egypt."[FOOTNOTE 15] Moreover, the government alleged, on both trips, once the chairman and his family arrived in the United States, Metcalf & Eddy "paid for most of the travel and entertainment expenses incurred by and on behalf of the Chairman and his family."[FOOTNOTE 16]

As a result, the government alleged, the "advance per diem payments were, in effect, unrestricted cash payments to the Chairman."[FOOTNOTE 17] In addition to the cash advances, on both trips Metcalf & Eddy paid to upgrade the chairman's airline tickets to first class and, on the second trip, paid for first class tickets for the chairman's wife and children.[FOOTNOTE 18]

The Metcalf & Eddy case was ultimately settled, with the company entering into an agreement permanently enjoining it from future FCPA violations, imposing a $400,000 civil fine and requiring it to pay $50,000 to reimburse the government for the costs of the investigation.[FOOTNOTE 19] Metcalf & Eddy also agreed to maintain a compliance and ethics program designed to detect and prevent violations of the FCPA and other applicable foreign bribery laws.[FOOTNOTE 20]

OPINION PROCEDURE RELEASES

In addition to case law guidance on the reach of the act, the FCPA provides a procedure for companies to obtain an opinion from the DOJ regarding its enforcement intentions with respect to prospective conduct. A favorable DOJ opinion provides a rebuttable presumption that the conduct does not violate the FCPA. [FOOTNOTE 21]

Releases pursuant to the DOJ's Opinion Procedure provide additional insight on what the Department views as acceptable under the act. For example, in Opinion Procedure Release No. 07-02,[FOOTNOTE 22] a U.S. insurance company proposed to pay the expenses for six foreign officials to attend an educational program at the insurance company's headquarters.

The officials had been "selected by the foreign government, without the involvement" of the insurance company, to attend an annual six-week internship program for foreign insurance regulators sponsored by the National Association of Insurance Commissioners (NAIC). The insurance company proposed to host the educational program for the officials upon conclusion of the NAIC event.

The release identified a number of factors as relevant to the DOJ's determination that it would not take any enforcement action with respect to the educational program, including:

• The program was scheduled to last for approximately six days (five days of training plus travel time) and covered expenses would include only those necessary and reasonable to educate the visiting officials about the operation of a U.S. insurance company.

• Travel expenses were limited to domestic economy class air travel to the insurance company's headquarters. The insurance company would not pay any expenses related to the foreign officials' travel to or from the United States.

• The insurance company would pay for the domestic lodging, local transport, meals and incidental expenses (up to a modest set amount per day upon presentation of a receipt), and a modest four-hour city sightseeing tour for the six officials.

• The insurance company would host only the designated officials (no family members would attend) who would be selected by the foreign government.

• The insurance company would pay all costs directly to the providers and, in the event that an expense required reimbursement, the insurance company would only do so, up to a modest daily minimum, upon presentation of a written receipt.

• Any souvenirs that the insurance company gave the visiting officials would reflect the insurance company's business and/or logo and would be of nominal value.

Release No. 07-01,[FOOTNOTE 23] issued shortly before Release No. 07-02, provides similar guidance. There, the DOJ declined to take enforcement action against a U.S. company that proposed to pay for travel by a six-person delegation of the government of an Asian country for a tour of the U.S. company's operations sites. The stated purpose of the visit was to familiarize the delegates with the nature of the company's operations and to help establish the business credibility of the company which, at the time, had no operations in the Asian country.

The visit was scheduled to last four days and, as was the case in Opinion Procedure 07-02, would be limited to the delegates -- no spouses or family members would make the trip. The foreign government would select the delegates and pay the international airfare. The company would pay the service providers directly for the costs of lodging, domestic transportation and meals.

In addition, the company obtained written assurance from an established law firm with offices in both the United States and the foreign country that the company's sponsorship of the visit and its payment of expenses was not contrary to the law of the foreign country. The company also represented that, apart from meals and receptions connected to meetings, speakers, or events, it would not fund or organize any entertainment or leisure activities for the officials. Nor would it provide the officials with a stipend and any gifts would be of a nominal value and would reflect the company's name or logo.

COMPLIANCE BEST PRACTICES

Comparing DOJ Opinion Procedure Releases 07-01 and 07-02 with Lucent and Metcalf & Eddy helps to define the scope of "reasonable and bona fide expenditures" under the FCPA.

For example, expenditures for economy class airfare in connection with promotional activities may be reasonable, but expenditures for first class airfare, and payments for travel for the spouse or family of an official, will likely draw skepticism or worse from prosecutors.[FOOTNOTE 24]

Whenever possible, companies should pay expenses directly to the service provider rather than reimbursing the foreign official. Indeed, companies should endeavor to avoid making any direct payments to foreign officials.

Giving cash or credit directly to such individuals only raises the risk that it will be used for purposes unrelated to the business promotional activity that is protected under the act. In those situations where a reimbursement cannot be avoided, the company must insist on documentation confirming that the expense was incurred by the official.

With respect to gifts for marketing purposes, while the safest course would be to avoid giving them altogether, they will not likely run afoul of the act when they are of nominal value and reflect the company's name or business logo.

The company should also ensure that payment of the travel and lodging expenses is legal in the officials' home country or it is unlikely to qualify as a "bona fide" expenditure. The foreign government, or the agency or division of the foreign government that employs the officials making the trip, also should be informed of, and understand the nature of, the travel. Indeed, the better practice is for the foreign government to select which officials make the trip in the first place.

Lastly, these basic guidelines should be reflected in the company's travel policy that is incorporated into a comprehensive and robust FCPA compliance program. In addition to setting forth specific company guidelines on travel, lodging, entertainment and other promotional expenditures, the program should designate an individual or individuals within the organization to review and approve such expenditures before they are incurred.

The compliance program should also provide for periodic FCPA training of company employees involved in sponsoring, or otherwise connected to, travel or entertainment for foreign officials. The compliance program should also make clear that there will be serious repercussions for employees who deviate from the company's guidelines.

Having such a program in place will significantly reduce the likelihood that promotional expenditures will run afoul of the FCPA.

Richard M. Strassberg, a partner in Goodwin Procter's litigation department and chair of its white-collar crime and government investigations practice resident in New York, is the former chief of the Major Crimes Unit of the U. S. Attorney's Office for the Southern District of New York. Kyle A. Wombolt is a partner in Goodwin Procter's Silicon Valley office and a member of the firm's securities litigation and SEC enforcement practice group.

:::::FOOTNOTES:::::

FN1 This provision is generally referred to as the anti-bribery provision. See 15 U.S.C. §78dd-1(a). The FCPA also includes certain record-keeping provisions. Companies whose securities are publicly traded in the United States must "make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect" their transactions, and "devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that," among other things, financial statements are prepared in conformity with generally accepted accounting principles. See §78m(b)(2).

FN2 The FCPA also contains an affirmative defense for payments that are "lawful under the written laws and regulations" of the foreign country in question. §78dd-1(c)(2). This defense is narrowly defined and, in practice, of little or no use. To fall within its parameters, there must be a statute or regulation that specifically authorizes the conduct in question. There is, however, no country with laws or regulations that authorize or permit bribery of public officials.

FN3 134 CONG. REC. H2115 (April 20, 1988) ("If a payment or gift is corruptly made, in return for an official act or omission, then it cannot be a bona fide, good-faith payment, and this defense would not be available.").

FN4 S.E.C. v. Lucent Technologies Inc., C.A. No. 07-2301 (D.D.C. Dec. 21, 2007), at ¶¶1-2.

FN5 Id.

FN6 Id.

FN7 See id. at ¶¶24-25.

FN8 Id. at ¶15.

FN9 Id.

FN10 Id. at ¶16.

FN11 Press Release, Department of Justice (Dec. 21, 2007); Press Release, U.S. Securities and Exchange Commission (Dec. 21, 2007).

FN12 United States v. Metcalf & Eddy Inc., C.A. No. 99CV-12566-N6 (D. Mass. Dec. 14, 1999), Complaint for Permanent Injunction and Ancillary Relief.

FN13 Id. at ¶16.

FN14 Id. at ¶17.

FN15 Id. at ¶18.

FN16 Id. at ¶19.

FN17 Id.

FN18 Id. at ¶¶20 and 21.

FN19 United States v. Metcalf & Eddy Inc., C.A. No. 99CV-12566-N6 (D. Mass. Dec. 14, 1999), Consent and Undertaking of Metcalf & Eddy Inc., at ¶12.

FN20 Id. at ¶4.

FN21 15 U.S.C. §78dd-1(e); See 20 C.F.R. §§80.1-80.16.

FN22 U.S. Department of Justice Review No. 07-02 (Sept. 11, 2007).

FN23 U.S. Department of Justice Review No. 07-01 (July 24, 2007).

FN24 But see U.S. Department of Justice FCPA Review Procedure Release No. 83-02 (July 26, 1983) (declining to take enforcement action against company that paid domestic travel expenses of foreign official's wife who was already in the U.S. at own expense).

Subscribe to New York Law Journal