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Gifts, Hospitality, Entertainment, Travel,Accommodation Expenses

& Facilitation Payments:What is Permissible?

December 2013

Lexpert® Anti-Bribery and CorruptionCompliance: 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 withCFPOA

¬ 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 GovernmentOfficials

¬ 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 foreigngovernment

¬ 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 ofbusiness

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

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

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

¬ Adequate due diligence is required to assure others do not act contrary toCFPOA 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.ca4

A. Reasonable Promotional Payments

¬ The following are affirmative defenses to the prohibited CFPOAactions (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 publicinternational organization for which the foreign public official performs duties orfunctions; or

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

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

(ii) the execution or performance of a contract between the person and theforeign 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 andservices; or

(ii) the execution or performance of a contract with the foreigngovernment

¬ Examples include:

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

¬ Tours of company facilities

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


Factors for Consideration

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

1. Purpose of the expenditure (must be articulated and permissiblebusiness-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 toofficial or third party

6. Whether expenditures are accurately reflected in books andrecords

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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 assouvenir items with company logos

¬ Business pending before recipient officials?

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

¬ Travel & Entertainment

¬ Travel expenses paid for promotion, demonstration of explanation of products orservices

¬ 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 locallaw

¬ No guarantee

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

¬ Government may place little or no weight on consistencyof such expenditures with social norms or local businesspractices; emphasis is on compliance with Canadian law

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3. Whether the value of the expenditureis reasonable?

¬ Gifts

¬ Gifts are reasonable if of “nominal value” bearing Company’s name or otherwise generally distributed to customersand 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 ofequivalent status

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4. Selecting Recipients

¬ Is there pending current or potential business withgovernment 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 guestsof officials

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5. Recipient of Funds: Paying ThirdParty Service Providers

¬ For travel/hospitality, a key safeguard can be directingpayments for expenses such as airlines, hotels, carservices etc. to the vendors themselves, rather than to theofficials

¬ 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 accuratelyreflected in books and records

¬ New accounting provision in CFPOA:creating a new books and records offencewhich prohibits certain bookkeeping practices;

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

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

¬ (b) makes transactions that are not recorded in those books and records or that areinadequately 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 andrecords;

¬ (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 financialcontrols which

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

¬ Provides reasonable assurances that transactions are executed asmanagement 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 settleimproper gift giving, travel and entertainment practices:

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

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

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

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

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

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

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

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

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¬ Lucent Technologies (2007): Global communications solutions providerconducted business in China. The company entered into a non-prosecutionagreement 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 USto “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, eventhough 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 providerconducted business in China. The company entered into a non-prosecutionagreement 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 USto “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, eventhough 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 basedon corrupt payments to officials in China, Malaysia and the UAE.

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

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

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

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

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

¬ Made cash payments to Angolan officials during various trainingtrips.

¬ Provided officials with cash spending money of $120 to $200 per dayat 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-levelofficials made to secure or expedite performance of'acts of a routine nature'

¬ Under the amendments, the exception for facilitationpayments will eventually be removed

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

¬ Companies whose anti-corruption policies currentlyallow for facilitation payments should considermodifying their policy accordingly



¬ Narrow exception for “facilitating or expediting”payments to secure performance of “a routinegovernmental 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 workpermits

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

¬ mail pick-up and delivery

¬ telecommunication services

¬ power and water supply

24Brenda 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 acrosscountry

¬ Authorized facilitation payment must be properly recorded inbooks and records

¬ Both qualitatively and quantitatively

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Facilitation Payments: Enforcement

¬ Panalpina (2010)

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

¬ Panalpina acting as freight forwarder for its customers madepayments to circumvent import laws, reduce customs dutiesand tax assessments and to obtain preferential treatment forimporting 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 ofrelatively small payments to Customs officials in the Philippines

¬ made to induce the officials to violate customs regulations, settle customs disputesand 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 madeto secure customs clearances in Argentina and Venezuela

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

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Compliance

1. 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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