Summary of May 16th teleconference on relief and recovery in Burma cyclone disaster (5/19/08)
Summary of Arabella Philanthropic Investment Advisors teleconference on relief and recovery needs and effective philanthropic strategies in response to the Myanmar (Burma) disaster (5/12/08)
The Foreign Corrupt Practices Act:
Compliance Issues for Corporate Donors
By Stephen Curran
Counsel, The Boeing Company
In the area of corporate philanthropy, the current hot topic has been compliance with U.S. antiterrorism laws and regulations. But corporations should be mindful of a second set of laws when making grants outside the United States—those found in the Foreign Corrupt Practices Act (FCPA).[1] "In general, the FCPA prohibits corrupt payments to foreign officials for the purpose of obtaining or keeping business."[2]
As with compliance with antiterrorism laws and regulations, there is no single process that provides for the corporate donor's complete FCPA protection; however, there are some steps corporations can take to help ensure FCPA compliance.
FCPA—Legal Elements
The FCPA requirements are divided into two independent categories: antibribery prohibition and record-keeping requirements.
Antibribery Prohibition
The FCPA prohibits corruptly giving anything of value to any foreign official for purposes of influencing any act by a foreign government or foreign government "instrumentality" to assist a corporation in obtaining or keeping business.[3] This prohibition also applies to foreign political parties and candidates for foreign office.[4] Additionally, the FCPA applies to corporate payments made to third parties (e.g., consultants, agents or other intermediaries) knowing that corrupt payments would be made to a government official for purposes of obtaining or keeping business.[5]
The FCPA provides an exception for "facilitating" payments made to secure the performance of routine government actions. For example, exceptions would include obtaining permits and licenses; providing police protection, mail pick-up and delivery; and providing phone service, power and water supply.[6]
Record-keeping Requirements
The FCPA requires corporations to: (1) keep books and records that accurately and fairly reflect the corporation’s transactions, including the purpose of the transactions, and (2) maintain a system of internal accounting controls to reasonably assure that management’s instructions are executed and any discrepancies in the books and records are reconciled.[7]
Potential Penalties
FCPA violations can result in both criminal and civil fines and penalties. For corporations criminally convicted of FCPA antibribery prohibitions, this could include criminal penalties of up to $2 million. For individuals criminally convicted, this could include fines and penalties of up to $100,000, and up to five years in prison.[8]
The Department of Justice is responsible for prosecuting criminal and civil violations. The Securities and Exchange Commission also can bring civil enforcement actions.
Applicability to Corporate Giving
The Securities and Exchange Commission’s 2004 civil proceeding brought against Schering-Plough, a major pharmaceutical company, demonstrates the FCPA perils and pitfalls that a corporation could face regarding international charitable giving.[9] This action resulted in a settlement between S-P and the SEC in which S-P denied any liability but agreed to pay a $500,000 civil penalty.[10]
The SEC alleged that a Polish subsidiary of S-P made improper payments to a charitable organization, the Chudow Castle Foundation. The Castle Foundation's head also served as director of a Polish government body that paid for and influenced the purchase of pharmaceutical products. The SEC charged that S-P made payments to the Castle Foundation to persuade the director to influence the purchase of S-P's products in Poland.
The SEC’s complaint raises a number of issues of interest to corporate donors:
The Castle Foundation was a bona fide charity. However, the SEC charged that the Polish S-P manager authorizing the donations did not view them as payments to support the charitable activities of the foundation, but as "dues" to obtain the director's assistance to influence the purchase of S-P’s products in Poland.
While the SEC characterized the donations to the Castle Foundation as “improper payments,” S-P was charged with hiding the contributions by offering false justifications for the grant’s purpose in violation of the record-keeping requirement of the FCPA. The SEC alleged that S-P’s books and records were incomplete or misleading, and many accounting entries concerning payments made to the Castle Foundation were disguised as other payments.
S-P's corporate giving program was supposed to target health and medical needs, but, as the SEC alleged, the Castle Foundation’s mission—the upkeep of castles—was not related to healthcare.[11]
There was no allegation that S-P’s U.S. parent corporation knew about the payments. Nevertheless, the SEC charged that S-P’s U.S. parent was responsible for its Polish subsidiary’s actions.
The SEC charged that S-P’s procedures for detecting FCPA violations by its subsidiary "were inadequate in that they did not require employees to conduct any due diligence prior to making promotional or charitable donations to determine whether any government officials were affiliated with proposed recipients."[12]
The SEC’s allegations against S-P for failing to conduct due diligence raise the question: What are some of the steps that U.S. corporate donors should take when making charitable donations to international organizations?
Potential Due Diligence
Basic Considerations
When a corporation gives to an international nonprofit organization or non-government organization (NGO), the corporation should find out as much information as possible about the organization and what the grant will be used for. For FCPA purposes, this due diligence should determine the likelihood that donated funds will be given to a foreign governmental organization, government official or politician.
If there is some relationship between the donation and a foreign government, the corporate donor must then determine what relationship, if any, the government official, organization or politician has with the corporation’s business. That is, are the government officials in a position to assist the corporation in getting or keeping business?
While this is the essence of the FCPA antibribery inquiry in the corporate charitable setting, the S-P case illustrates some other FCPA compliance and due diligence steps a corporation should consider.
Additional Steps
Companywide controls. As in S-P, the U.S. government will attempt to hold U.S. parent corporations responsible for the actions of subsidiaries and international operations. Corporate donors should train staff and monitor their international operations in compliance with the FCPA. Moreover, U.S. corporations should institute a set of controls on corporate philanthropy and record-keeping applicable to its international operations.
Records of transactions. As the books and records area of the FCPA and the S-P proceeding make clear, corporations must have adequate controls over books and records to ensure accounting entries accurately reflect the corporate donor’s activities, that management’s instructions are carried out and that errors or deficiencies are caught and fixed.
Consistency with philanthropic mission. The S-P case has provided another question not often thought of in compliance with the FCPA—is an individual corporate grant consistent with the corporation’s stated philanthropic mission? If not, is the reason for any donation that deviates from the philanthropic mission adequately documented?
Transparency.Where a corporate donation is targeted at a specific project, is there some follow up to help ensure that the funds were spent for the stated purpose? It would be unrealistic to expect a corporate donor to visit every international site or nonprofit or NGO to which it may give funds, but a corporation could ask some questions to assist it, such as:
Will the donor receive status reports on the project’s progress?
If the donation is to buy goods and services, are the prices reasonable in that part of the world for those particular goods and services?
Is there an objective and fair means by which the charity will distribute funds?
Nonprofit/NGO financial controls. Does the nonprofit or NGO have budgets, audits or other financial controls and will it share those with the donor?
References. If the nonprofit or NGO is new to the corporate donor, the corporation should look at the organization’s reputation and track record. Two valuable resources are the Internet and references from other corporate donors who have dealt with the organization.
Conclusion
Of course, not every question needs to be asked in every circumstance, and there are more questions that a corporate donor may ask depending on the circumstances. But, while dealing with antiterrorism rules and regulations, corporate donors cannot ignore the FCPA when giving internationally.
About the Author
Stephen J. Curran is counsel for The Boeing Company's corporate offices in Chicago.
[9]SeeIn the Matter of Schering Plough Corporation: Order Instituting Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Cease And Desist Order, U.S. Securities and Exchange Act, Administrative Proceeding File No. 3-11517 (June 9, 2004).
[10]See U.S. SEC Litigation Release No. 18740 (June 9, 2004).
[11] SEC v. Schering-Plough, Case No. 1:04CV00945, Civil Complaint ¶¶12-13 (D.D.C. June 9, 2004).
