Because of the visibility and price tags surrounding the Olympic Games that kick off next month, London 2012 may be a high-profile test case for the U.K. Bribery Act’s application to corporate hospitality expenditures. The Bribery Act, which took effect in July 2011, makes it illegal for commercial organizations to fail to prevent bribes from being paid on their behalf in order to obtain or retain business or a business advantage.

Since Parliament passed the act in 2010, the U.K.’s Serious Fraud Office (SFO) has made clear that “sensible and proportionate” corporate hospitality expenditures are allowed under the act, and that it recognizes the importance of business entertaining.

U.K. Secretary of State for Justice Kenneth Clarke even directly addressed sporting events as promotional expenditures in his forward to the Ministry of Justice’s guidance on the Bribery Act. “Rest assured—no one wants to stop firms getting to know their clients by taking them to events like Wimbledon or the Grand Prix,” he wrote. SFO Director Richard Alderman has made similar statements. “The notion that the SFO would be interested in … the opportunity to watch a match at Twickenham seemed to me to be greatly exaggerated,” he said at a speech in April 2011.

Still, the Olympics may be another animal.

Tickets to the men’s swimming 100-meter freestyle finals are reselling online for prices reaching $1,000. Lodging and transportation costs surrounding the Olympics will far exceed those of a typical visit to London. And ticket resale companies are peddling Olympics packages with serious price tags. A Channel 4 report in February found that one top-notch package for a group of 23 was being sold for more than $700,000.

Couple the big-ticket events with a statute in its infancy, and it’s likely that we’ll see Bribery Act prosecutions brought in relation to conduct that occurs at the Olympics, says Jay Perlman, a director at Navigant Consulting in its global investigations & compliance segment.

“With the Olympics, it’s not only the cost, but the optics of it,” Perlman says. “Olympics tickets by their nature are popular and scarce, and they’re kind of a benefit or a perk. If you offer those kinds of things in a situation where you may be seeking to establish or maintain a business relationship, it has the potential to raise some eyebrows.”

Five Factors

Unlike the U.S. Foreign Corrupt Practices Act (FCPA), the Bribery Act covers bribery to government officials as well as commercial bribery. But similar to the FCPA, it generally has extraterritorial reach, applying to companies that do any kind of business in the U.K. (It’s not limited to conduct that takes place in the U.K., either.) Companies charged under the FCPA can assert a statutory affirmative defense regarding reasonable corporate hospitality expenditures. The Bribery Act provides no such affirmative defense, which initially made hospitality expenditures one of corporations’ major concerns about the act.

The SFO has put forth guidance on how it will determine whether a particular corporate expenditure is reasonable and proportionate. In a 2011 speech, Chris Walker, SFO head of policy, outlined five factors the agency may consider: whether the company has issued a clear policy on gifts and hospitality; whether the scale of the expenditure in question is within the limits set out in the policy and, if not, whether the person making it asked a senior colleague for special permission to make it; whether the expenditure was proportionate (based on who received it); whether there is evidence that the company recorded the expenditure and whether the recipient was entitled to receive the hospitality under the law of the recipient’s country.

Risk Assessment

In light of the Bribery Act, and in keeping with such guidance, many companies are taking a fresh look at their policies and procedures on corporate hospitality and putting tighter controls in place. For example, Perlman says, a company may require written preapproval of any corporate hospitality expenditures and then, after the expenditure is made, may require employees to certify that they abided by the preapproved terms.

Perlman advises that companies examine the particular facts and circumstances of each situation. Companies face higher risk, for instance, if they’re taking a client to the Olympics opening ceremonies around the same time their contract is about to run out, or if they’re seeking new business from the party they’re bringing to an event.

“The government is going to have the benefit of 20/20 hindsight, and they’re going to see … if you offered someone Olympics tickets and then a few months later you got the business,” Perlman says. “That’s why it’s so important for companies to have tight enough controls in place to make sure these situations are looked at on a case-by-case basis to determine whether and to what extent they could violate the Bribery Act or the FCPA.”

Gray Area

The U.K. government has stopped short of setting specific boundaries on corporate hospitality expenditures.

In speeches since the Bribery Act’s passage, SFO Director Alderman has given several examples of scenarios that are and are not acceptable under the law. Flying prospective clients to Russia to see operations there is “no problem … if that is the best way of demonstrating to those prospective clients what you can do,” he has said. Reasonable hotels and meals for those prospective clients would be acceptable.

However, if the prospective client is then treated to a month-long stay on a private island and provided with spending money, “we will be inclined to ask whether bribery is taking place … It is clear to me,” Alderman said, “that most companies clearly understand the difference between what is permissible here and what is not permissible.”

But Jonathan Armstrong, a partner at Duane Morris in London, says the government could have given more specifics on what is lavish or excessive under the act.

“It would have been relatively easy to give more clarity in the Ministry of Justice guidance that accompanies the act,” says Armstrong. “The difficulty is most corporations don’t know what ‘lavish’ hospitality is. Is it $50? $250? $2,500? $25,000? It would have been helpful to set some sort of a marker down.”

Another gray area in the Olympics context is whether the government would look at an event ticket’s face value or resale value, which could be much higher in the case of the most in-demand sporting events. In addition, sponsors of the games will receive tickets and packages. But just because the companies didn’t pay for the tickets doesn’t mean they will be considered free for purposes of the Bribery Act.

“Some people think that because the tickets were free that it’s not a Bribery Act issue,” Armstrong says. “That’s not the case. A juror is bound to look at the ‘eBay value’ of those tickets.”