gifts, hospitality, entertainment, travel, accommodation expenses & facilitation payments: what...

Gifts, Hospitality, Entertainment, Travel, Accommodation Expenses

& Facilitation Payments:What is Permissible?

December 2013

Lexpert® Anti-Bribery and Corruption Compliance: Coping with the Onslaught

Calgary/TorontoBrenda C. Swick

[email protected] 601 7545

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Brenda C. Swick, International Trade and Investment Law and Government Contracting, McCarthy Tétrault LLP / mccarthy.ca

CFPOA – Provisions Related to Gifts, Hospitality and Facilitation Payments

¬ Canadian persons (companies and individuals) must comply with CFPOA

¬ Governs interactions with foreign government officials

¬ Prohibited transactions - need to have corrupt intent

¬ Exceptions

¬ Promotional expenses

¬ Facilitating Payments

¬ Accounting for gifts, hospitality and facilitating payments

CFPOA - Definition of Government Officials

¬ Foreign government official or employee

¬ Regardless of rank or position in the organization

¬ Includes STEs

¬ Official or employee of public international organization

¬ World Bank, UN, Red Cross

¬ Person acting in an official capacity for or on behalf of a foreign government

¬ Can include honorary or ceremonial positions

¬ Political party members, party officials or political candidates

¬ Judiciary

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CFPOA – Prohibited Transactions

¬ Offering, promising, authorizing payment of any gift, hospitality

¬ For the purposes of obtaining or retaining business

¬ For the purpose of obtaining or retaining an advantage in the course of business

¬ As consideration for an act or omission by the official in connection with his official duties

¬ To induce the official to use his position to influence any act or decision of his government

¬ Third Parties – Cannot have other do what you cannot do

¬ Adequate due diligence is required to assure others do not act contrary to CFPOA on your behalf

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Permissible Payments

¬ Permissible payments

A. Reasonable Promotional Expenditures

B. Facilitation Payments

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Brenda C. Swick, International Trade and Investment Law and Government Contracting, McCarthy Tétrault LLP / mccarthy.ca 5

A. Reasonable Promotional Payments

¬ The following are affirmative defenses to the prohibited CFPOA actions (s.3(3)):

No person is guilty of an offence under subsection (1) if the loan, reward, advantage or benefit

(a) is permitted or required under the laws of the foreign state or public international organization for which the foreign public official performs duties or functions; or

(b) was made to pay the reasonable expenses incurred in good faith by or on behalf of the foreign public official that are directly related to

(i) the promotion, demonstration or explanation of the person’s products and services, or

(ii) the execution or performance of a contract between the person and the foreign state for which the official performs duties or functions.

¬

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Reasonable Promotional Expenditures

¬ Permissible gifts, entertainment or travel expenses must be:

¬ Reasonable and bona fide

¬ For the express purpose of the

(i) the promotion, demonstration or explanation of products and services; or

(ii) the execution or performance of a contract with the foreign government

¬ Examples include:

¬ Sponsorship of seminars or educational programs for foreign officials on your company’s products or services

¬ Tours of company facilities

¬ Payments should be fully documented, supported by original receipts and properly approved


Factors for Consideration

Determine whether gifts, entertainment or travel expenses are reasonable and bona fide by considering several factors;

1.Purpose of the expenditure (must be articulated and permissible business-related purpose)

2.Whether expense complies with local law

3.Whether the value of the expenditure is reasonable

4.Whether the method of selecting the recipients is reasonable

5.Whether payment for travel and entertainment is made directly to official or third party

6.Whether expenditures are accurately reflected in books and records

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1. Purpose of the expenditure

¬ Gifts

¬ Product Sample provided for inspection or testing purposes

¬ Gifts of nominal value given in connection with promotional activities such as souvenir items with company logos

¬ Business pending before recipient officials?

¬ Gifts given with corrupt intents would be not reasonable or bona fide and a violation of CFPOA

¬ Travel & Entertainment

¬ Travel expenses paid for promotion, demonstration of explanation of products or services

¬ Includes expenses paid for educational instructional and training purposes

¬ Payments for entertainment and travel expenses solely for sightseeing, entertainment and leisure purposes would be a violation of the CFPOA

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2. Whether expense complies with local law

¬ No guarantee

¬ Written assurance sometimes from an established law firm of local law compliance can be helpful

¬ Government may place little or no weight on consistency of such expenditures with social norms or local business practices; emphasis is on compliance with Canadian law

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3. Whether the value of the expenditure is reasonable?

¬ Gifts

¬ Gifts are reasonable if of “nominal value” bearing Company’s name or otherwise generally distributed to customers and suppliers as tokens of goodwill (e.g. souvenirs)

¬ Given to reciprocate a gift but should be of reasonably equivalent value

¬ Little guidance on “reasonableness” beyond very small items

¬ Travel/ Entertainment

¬ “Moderate” value

¬ Avoid “lavish” meals or travel arrangements

¬ Strict limits on leisure side trips

¬ Avoid cash and equivalents, if possible

¬ If cash amount (such as per diem), must be reasonable estimation of legitimate expense

¬ Avoid paying for

¬ expenses relating to family members or others

¬ expenses relating to destinations that are not directly related to the company’s facilities or business

¬ travel expenses in excess of those that would likely be incurred by Canadian company employees of equivalent status

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4. Selecting Recipients

¬ Is there pending current or potential business with government officials involved?

¬ Allow the government to select the recipients of the benefit

¬ Otherwise be transparent with superiors of recipients

¬ Do not pay expenses for spouses, family, or other guests of officials

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5. Recipient of Funds: Paying Third Party Service Providers

¬ For travel/hospitality, a key safeguard can be directing payments for expenses such as airlines, hotels, car services etc. to the vendors themselves, rather than to the officials

¬ Officials cannot convert the benefit to cash

¬ Enhances transparency and ease of record-keeping

¬ Otherwise obtain receipt and reimburse official

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6. Whether expenditures are accurately reflected in books and records ¬ New accounting provision in CFPOA:creating a new books and records offence

which prohibits certain bookkeeping practices;

¬ 4. (1) Every person commits an offence who, for the purpose of bribing a foreign public official in order to obtain or retain an advantage in the course of business or for the purpose of hiding that bribery,

¬ (a) establishes or maintains accounts which do not appear in any of the books and records that they are required to keep in accordance with applicable accounting and auditing standards;

¬ (b) makes transactions that are not recorded in those books and records or that are inadequately identified in them;

¬ (c) records non-existent expenditures in those books and records;

¬ (d) enters liabilities with incorrect identification of their object in those books and records;

¬ (e) knowingly uses false documents; or

¬ (f) intentionally destroys accounting books and records earlier than permitted by law.

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CFPOA: Accounting Requirements

¬ It is an offence, for the purpose of concealing bribery of a public official to:

¬ keep secret accounts,

¬ falsely record, not record or inadequately identify transactions,

¬ enter liabilities with incorrect identification of their object,

¬ use false documents, or

¬ destroy accounting books and records earlier than permitted by law

¬ Companies should have a robust system of accounting and financial controls which

¬ Accurately record transaction with enough detail to identify the transactions (quantitatively and qualitatively)

¬ Provides reasonable assurances that transactions are executed as management has authorized

¬

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Gifts, Entertainment and Hospitality:Lessons from Enforcement Actions

¬ Diageo (2011): British spirits company paid more than $16 million to US SEC to settle improper gift giving, travel and entertainment practices:

¬ Spent $64,184 on rice cakes and other gifts for South Korean military over four years Gifts ranged from $100 to $300 per recipient. Many of the recipients officials were responsible for procuring Diageo products.

¬ Provided more than $100,000 in travel and entertainment expenses to South Korean customs and other officials to inspect scotch facilities in Scotland, adding purely recreational side trips to Prague and Budapest.

¬ Several expenses recorded as “Entertainment-Customer”, hiding the fact that the recipients were officials.

¬ Spent $165,287 on hundreds of non-traditional and non-seasonal gifts for the South Korean military. The SEC found that these payments were actually for the purpose of influencing specific purchasing decisions.

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¬ Aon Corporation (2011): US insurance brokerage firm administered training funds that were purportedly used to educate Costa Rican insurance officials on industry issues by providing travel to seminars and conferences. The company settled for $16.2 million in criminal penalties:

¬ The training funds reimbursed officials for non-training related activities, like travel, hotel and meals, sometimes with their spouses, at tourist destinations including Paris, Zurich, Munich, and Cairo. These trips had only a minor, if any, business related component.

¬ Many of the invoices and records did not provide the business purposes or otherwise show that the trips were related to legitimate business activities. Some of the subject matters recorded, like a literary conference and a Mexican information technology conference, which had no logical connection to the insurance industry.

¬ Over eight years, company earned profits of $1.8 million in connection with its Costa Rica insurance business.

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¬ Lucent Technologies (2007): Global communications solutions provider conducted business in China. The company entered into a non-prosecution agreement with US DOJ, agreeing to pay in excess of $2 million in penalties.

¬ Spent over $10 million over 3 years to take hundreds of Chinese officials to the US to “inspect” facilities in 315 trips.

¬ The officials were all from state-owned and state-controlled telecom entities.

¬ They visited Hawaii, Las Vegas, New York, Disneyworld, Grand Canyon, even though no company facilities existed in those places.

¬ The company improperly recorded the expenses as business trips.

¬ The company benefitted from this activity with an estimated $50 million in contracts.

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Gifts, Entertainment and Hospitality:Enforcement

¬ Lucent Technologies (2007): Global communications solutions provider conducted business in China. The company entered into a non-prosecution agreement with US DOJ, agreeing to pay in excess of $2 million in penalties.

¬ Spent over $10 million over 3 years to take hundreds of Chinese officials to the US to “inspect” facilities in 315 trips.

¬ The officials were all from state-owned and state-controlled telecom entities.

¬ They visited Hawaii, Las Vegas, New York, Disneyworld, Grand Canyon, even though no company facilities existed in those places.

¬ The company improperly recorded the expenses as business trips.

¬ The company benefitted from this activity with an estimated $50 million in contracts.

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Gifts, Entertainment and Hospitality:Enforcement¬ Control Components, Inc. (2009): The DOJ settled with a

control valves company for an $18.2 million criminal fine based on corrupt payments to officials in China, Malaysia and the UAE.

¬ Gifts included the payment of college tuitions of at least two officials who were company clients

¬ Provided officials with five-star hotel rooms and charger boat trips in Hawaii and Las Vegas under the guise of training or inspection trips. The DOJ stated that the “actual propose of the trips were to reward the customers’ officers and employees for causing their employees to purchase the company’s products, to retain current business and to obtain new business for the company”.

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¬ Johnson and Johnson (2011): The company provided more than $7M in travel sponsorships unrelated to conferences or other business purposes to public doctors in Poland who agreed to purchase its medical products and to prescribe its drugs.

¬ As part of the scheme, it also made arrangements with travel agents to overcharge for the travel and then give the extra money to the officials as “pocket money”.

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¬ ABB (2009): As part of the settlement with US authorities, the company paid $16M in fines:

¬ Made cash payments to Angolan officials during various training trips.

¬ Provided officials with cash spending money of $120 to $200 per day at a time with Angola’s gross annual per capital income was just $710. On another trip the cash payments totaled $4,320 per official.

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¬ Facilitation payments are small payments to low-level officials made to secure or expedite performance of 'acts of a routine nature'

¬ Under the amendments, the exception for facilitation payments will eventually be removed

¬ Timing for removal of exception is subject to a further order of the Governor in Council

¬ Companies whose anti-corruption policies currently allow for facilitation payments should consider modifying their policy accordingly



¬ Narrow exception for “facilitating or expediting” payments to secure performance of “a routine governmental action”

¬ Must involve no exercise of discretion by the official

¬ Factors:

¬ Whether official's action is required, not discretionary

¬ Size of the payment (larger could suggest corrupt intent)

¬ Whether isolated or repetitive

¬ Note: Gifts and Hospitality not natural fit here


Facilitation Payments

¬ Include:

a) issuance of a permit to qualify a person to do business

b) the processing of official documents, such as visas and work permits

c) the provision of services normally offered to the public, such as

¬ mail pick-up and delivery

¬ telecommunication services

¬ power and water supply

25Brenda C. Swick, International Trade and Investment Law and Government Contracting, McCarthy Tétrault LLP / mccarthy.ca

Facilitation Payments

d) the provision of services normally provided, such as

¬ police protection

¬ loading and unloading of cargo

¬ protection of commodities from deterioration

¬ scheduling of inspections related to contract performance

¬ scheduling of inspections related to transit of goods across country

¬ Authorized facilitation payment must be properly recorded in books and records

¬ Both qualitatively and quantitatively

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Facilitation Payments: Enforcement

¬ Panalpina (2010)

¬ Panalpina and 6 customers paid over $257M in fines and penalties

¬ Panalpina acting as freight forwarder for its customers made payments to circumvent import laws, reduce customs duties and tax assessments and to obtain preferential treatment for importing certain equipment into West Africa

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Facilitation Payments: Enforcement

¬ Con-Way Inc. (2008)

¬ Global freight forwarder paid $300,000 penalty for making hundreds of relatively small payments to Customs officials in the Philippines

¬ made to induce the officials to violate customs regulations, settle customs disputes and reduce or not enforce otherwise legitimate fines for administrative violations

¬ Helmerich and Payne (2009)

¬ Paid a penalty and disgorgement fee of $1.3M for payments which were made to secure customs clearances in Argentina and Venezuela

¬ Payments ranged from $2.000 to $5,000 to import illegal goods and evade the payment of customs duties

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Compliance1. Approving Gift and Hospitality & Facilitation Requests

¬ Identify and empower responsible person to review and approve requests

¬ Identify person receive and review concerns and questions

2. Train your employees

¬ Training targeted based on duties and exposure to risk

¬ Informed about approval process and where to get help

3. Approval process

¬ Documented

¬ Who approves

¬ Standards for approval

¬ Dollar limits

4. Approved expenses must be adequately described

¬ Nature and reasons for travel, meals, gift & hospitality

¬ Recipients names/positions/duties

¬ Actual costs per person

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Brenda C. SwickMcCarthy Tétrault LLPInternational Trade and Investment Law/Government Contracting Lawwww.mccarthy.caDirect Line: 416-601-7545

E-mail: [email protected]

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